OECD says UK will be only big, rich economy to shrink this year

OECD says UK will be only big, rich economy to shrink this year

17 Mar    Finance News, News

The UK is still on course to be the only big wealthy economy to register negative growth this year, despite an upturn in growth prospects, according to new international forecasts.

Projections from the Organisation for Economic Coordination and Development (OECD) show that the UK economy will be an outlier among wealthier countries with an annual contraction in growth this year of 0.2 per cent.

That is 0.2 percentage points better than the OECD’s last forecast in November but remains the worst performance among the richest countries.

The OECD’s forecast matches updated projections from the Office for Budget Responsibility (OBR), which said this week that the economy would narrowly avoid a technical recession this year, defined as two quarters of negative growth. The improved outlook is the result of lower energy prices and resilient consumer and business sentiment recorded this year. The economy will experience a “mild” recovery of 0.9 per cent next year, according to the OECD forecast.

Germany, which was expected to be the worst-performing economy in the eurozone, will now record positive growth of 0.3 per cent rather than a 0.3 per cent contraction, according to the OECD, which also upgraded its projections for Italy, Spain and France. The single currency area is on course to record annual growth of 0.8 per cent this year and global growth to fall from 3.2 per cent in 2022 to 2.6 per cent.

The United States, the world’s largest economy, will record growth of 1.5 per cent this year, 0.5 percentage points better than the last forecast, before slowing to growth of 0.9 per cent in 2024, partly as a result of aggressive monetary tightening from the US Federal Reserve.

Headline inflation in the UK is on course to average 6.7 per cent this year, in line with the likes of Germany and Italy. The OBR expects consumer price inflation to drop to 2.9 per cent by the end of the year.

The OECD said growth across the world economy would remain below pre-pandemic trends but falling inflation would give a bigger boost to incomes this year than expected. “The improvement in the outlook is still fragile,” it said. “Risks have become somewhat better balanced but remain tilted to the downside. Uncertainty about the course of the war in Ukraine and its broader consequences is a key concern.”

Amid concerns over global financial stability following the collapse of three US banks this week the report warned that further interest rate rises could “continue to expose financial vulnerabilities” in the markets.

Problems in parts of the financial system in recent months, including the UK’s pension fund crisis, will require central banks to carry out “clear communication” over the shrinking of their balance sheets to “minimise the risk of contagion”, the OECD said.

“Higher interest rates could also have stronger effects on economic growth than expected, particularly if they expose underlying financial vulnerabilities. While a cooling of overheated markets, including real estate markets, and repricing of financial portfolios are standard channels through which monetary policy takes effect, the full impact of higher interest rates is hard to gauge.”

James Hunt, the chancellor, said: “The British economy has proven more resilient than many expected, outperforming many forecasts to be the fastest growing economy in the G7 last year, and is on track to avoid recession.

“Earlier this week I set out a plan to grow the economy by unleashing business investment and helping more people into work, alongside extending our significant energy bill support to help with rising prices, made possible by our windfall tax on energy profits.”

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