By Ian McConnell
Business Editor
The UK will next year stagnate and be the worst-performing economy among the Group of Seven leading industrialised nations by a significant margin, a leading global think-tank now forecasts.
The Organisation for Economic Cooperation and Development, highlighting the major detrimental impact of Russia’s invasion of Ukraine on the global economy in its latest twice-yearly outlook published yesterday, declared the UK Government “should consider slowing fiscal consolidation to support growth”. It observed the Boris Johnson administration had already started to tighten fiscal policy. And it noted UK household incomes were falling in real terms.
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In December, the Paris-based OECD had projected the UK would grow by 2.1% next year, so the new forecast of zero expansion represents a sharp downgrade.
The think-tank projects that, among the G7, the US and Italy will be the joint-second-worst performers in 2023, each growing by 1.2%. It forecasts global expansion of 2.8% next year.
The OECD has cut its prediction of global growth this year from 4.5% to 3%. It has reduced its forecast of UK expansion this year to 3.6%, from 4.7% last December, although this would still mean the country would be the second-best performer in the G7 in 2022. Canada is projected to achieve gross domestic product growth of 3.8% this year.
Giving its view of required policy measures in the UK, the OECD said: “Fiscal policy has to balance gradual fiscal tightening with well-targeted support to protect vulnerable households from the rising cost of living and significant spending and investment needs to support productivity.”
The think-tank observed: “Fiscal policy has started to tighten, with the main pandemic support measures phased out at the end of 2021. Other measures, such as the temporary reduced VAT (value-added tax) rates on hospitality and recreational services, ended on 31 March 2022. To return to a sustainable fiscal path, the Government has committed to a gradual medium-term fiscal consolidation plan, with planned increases in tax revenues and increased investment.”
However, the OECD declared: “The Government should consider slowing fiscal consolidation to support growth.”
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The think-tank noted the UK unemployment rate, on the International Labour Organisation measure, had fallen to 3.7% in the first quarter of this year.
The OECD said “unemployment is set to remain low,” but forecast it “will increase gradually to 4.5% by the end of 2023 due to weaker demand”.
The think-tank added: “The UK economy is susceptible to economic spill-over effects from Russia’s invasion into Ukraine through rising energy prices and supply-chain disruptions. The United Kingdom has limited direct trade and financial linkages with Russia and Ukraine, but higher global energy prices add to the squeeze on household incomes, which are now declining in real terms.”
Detailing its expectations for the UK economy this year and in 2023, and underlining inflationary pressures, the OECD said: “Output is projected to grow by 3.6% in 2022 before stagnating in 2023 due to depressed demand. Private consumption will slow as rising prices erode households’ incomes. Household savings will decline to below pre-pandemic levels, with some households taking on more debt to keep up with the rising cost of living.
“Inflation will continue to rise, peaking at just over 10% in the fourth quarter of 2022, driven by increasing global prices of tradable goods and services due to supply bottlenecks, transportation costs and energy prices.”
Annual UK consumer prices index inflation leapt to 9% in April, from 7% in March, figures published last month by the Office for National Statistics showed.
Highlighting the impact of the war in Ukraine and China’s zero-Covid policy on the global economy, the OECD said: “The war in Ukraine has generated a major humanitarian crisis affecting millions of people. The associated economic shocks, and their impact on global commodity, trade and financial markets, will also have a material impact on economic outcomes and livelihoods.
“Prior to the outbreak of the war the outlook appeared broadly favourable over 2022/23, with growth and inflation returning to normality as the Covid-19 pandemic and supply-side constraints waned. The invasion of Ukraine, along with shutdowns in major cities and ports in China due to the zero-Covid policy, has generated a new set of adverse shocks.”
Laurence Boone, OECD chief economist and deputy secretary-general, said: “The world is set to pay a hefty price for Russia’s war against Ukraine.
“A humanitarian crisis is unfolding before our eyes, leaving thousands dead, forcing millions of refugees to flee their homes and threatening an economic recovery that was under way after two years of the pandemic. As Russia and Ukraine are large commodity exporters, the war has sent energy and food prices soaring, making life much harder for many people across the world.”
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