• NIESR forecasts a further fall in house prices
• Cost of servicing national debt set to double

The UK economy will not fully recover from the recession until 2014, according to a top thinktank which also warned today that house prices will keep falling for another three years.

The National Institute of Economic and Social Research (NIESR) predicted that it will take another five years until income per head has returned to the level seen before the recession started in the second quarter of 2008. In a gloomy assessment of Britain’s economic prospects, it also warned that the cost of servicing the country’s soaring national debt will almost double within four years.

NIESR’s latest forecast is that the UK economy shrank by 0.4% between April and June, which would mean the recession would have lasted for five quarters. It believes the recovery will not begin until the last three months of 2009, and then only with anaemic growth of 0.5%.

“The recovery will be weak,” warned NIESR economist Simon Kirby yesterday. “We see continued contraction in consumer spending and business investment [in 2010].”

On house prices, NIESR does not share the recent optimism that the market might be bottoming out.

“There has been talk of stabilization and some recovery in the housing market, but we don’t think this is the case,” said Kirby. “We only see growth in the housing market returning in 2012.”

Faced with the worst economic downturn since the Great Depression, the UK government is planning to spend its way back to recovery. NIESR warned that the resulting public borrowing will put a heavy burden on the public finances, and called for aggressive cuts to public spending.

“The introduction of a more credible plan to return the public finances to a path of fiscal sustainability remains a necessity,” it said, in a clear warning to chancellor Alistair Darling – and his possible successor, George Osborne.

Even after assuming that public spending will indeed be slashed, NIESR has calculated that annual borrowing will still be over £120bn in 2014 – some £23bn more than Darling’s own estimate.

The government is expected to borrow £165.7bn this year to balance the books, with further massive borrowing already inked in for future years. Last month alone it borrowed £13bn to cope with a sharp fall in tax receipts.

According to NIESR’s forecasts, the cost of servicing this debt will swell from £25.6bn this fiscal year to £50.7bn in 2013/14.