Britain's economy will return to modest growth in 2013 after flatlining this year, with developments in the euro zone posing the biggest risk, a leading think-tank said on Friday.
The National Institute for Economic and Social Research (NIESR) forecast that GDP would dip this year by 0.1 percent, up from its August forecast of a 0.5 percent contraction, after surprisingly strong expansion in the third quarter.
However, NIESR revised down its 2013 growth forecast to 1.1 percent from 1.3 percent, due to a weaker global outlook.
"Risks to the UK economy are dominated by the external environment," it said. "Developments in the euro area are most important, both because of trade and financial sector linkages."
NIESR economist Simon Kirby told reporters the think-tank did not expect more quantitative easing asset purchases from the Bank of England over the next few years, adding that Britain's monetary policy was likely to remain accommodative until 2020.
The think-tank reiterated its view that Britain's austerity measures pushed through by the governing coalition continued to damage the country's recovery.
A return of domestic demand and business investment is required for a sustained recovery, NIESR said.
Kirby described current business investment as "shockingly low", noting that it was 14 percent below pre-recession levels.
He said the central bank's Funding for Lending Scheme - which provides cheap funding to banks if they keep up lending to households and businesses - might improve that slightly.
"But the concern is that the banks have free reign over where they are going to enhance their lending and it will in all likelihood go to the least risky borrower," he added.
Subsequently the scheme will have a less positive impact on the economy than some hope, Kirby said.
The scheme was a "short-term measure" that did not get at the heart of the problems in Britain's banking system, said Angus Armstrong, another economist at the think-tank.
"If there's a problem, why don't you actually address the market problems... If it's because the banks can't fund themselves, then maybe you should look at why that's the case?"
(Editing by Hugh Lawson)