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

The UK remains to be on the right track to be the one huge rich economic system to register destructive development this yr, regardless of an upturn in development prospects, in keeping with new worldwide forecasts.

Projections from the Organisation for Financial Coordination and Improvement (OECD) present that the UK economic system will likely be an outlier amongst wealthier international locations with an annual contraction in development this yr of 0.2 per cent.

That’s 0.2 proportion factors higher than the OECD’s final forecast in November however stays the worst efficiency among the many richest international locations.

The OECD’s forecast matches up to date projections from the Workplace for Price range Duty (OBR), which mentioned this week that the economic system would narrowly keep away from a technical recession this yr, outlined as two quarters of destructive development. The improved outlook is the results of decrease power costs and resilient client and enterprise sentiment recorded this yr. The economic system will expertise a “delicate” restoration of 0.9 per cent subsequent yr, in keeping with the OECD forecast.

Germany, which was anticipated to be the worst-performing economic system within the eurozone, will now report optimistic development of 0.3 per cent relatively than a 0.3 per cent contraction, in keeping with the OECD, which additionally upgraded its projections for Italy, Spain and France. The only forex space is on the right track to report annual development of 0.8 per cent this yr and international development to fall from 3.2 per cent in 2022 to 2.6 per cent.

America, the world’s largest economic system, will report development of 1.5 per cent this yr, 0.5 proportion factors higher than the final forecast, earlier than slowing to development of 0.9 per cent in 2024, partly on account of aggressive financial tightening from the US Federal Reserve.

Headline inflation within the UK is on the right track to common 6.7 per cent this yr, in keeping with the likes of Germany and Italy. The OBR expects client worth inflation to drop to 2.9 per cent by the tip of the yr.

The OECD mentioned development internationally economic system would stay beneath pre-pandemic tendencies however falling inflation would give a much bigger enhance to incomes this yr than anticipated. “The advance within the outlook remains to be fragile,” it mentioned. “Dangers have turn out to be considerably higher balanced however stay tilted to the draw back. Uncertainty in regards to the course of the warfare in Ukraine and its broader penalties is a key concern.”

Amid considerations over international monetary stability following the collapse of three US banks this week the report warned that additional rate of interest rises may “proceed to show monetary vulnerabilities” within the markets.

Issues in elements of the monetary system in current months, together with the UK’s pension fund disaster, would require central banks to hold out “clear communication” over the shrinking of their steadiness sheets to “minimise the danger of contagion”, the OECD mentioned.

“Greater rates of interest may even have stronger results on financial development than anticipated, notably in the event that they expose underlying monetary vulnerabilities. Whereas a cooling of overheated markets, together with actual property markets, and repricing of economic portfolios are normal channels by which financial coverage takes impact, the complete affect of upper rates of interest is difficult to gauge.”

James Hunt, the chancellor, mentioned: “The British economic system has confirmed extra resilient than many anticipated, outperforming many forecasts to be the quickest rising economic system within the G7 final yr, and is on monitor to keep away from recession.

“Earlier this week I set out a plan to develop the economic system by unleashing enterprise funding and serving to extra individuals into work, alongside extending our important power invoice assist to assist with rising costs, made doable by our windfall tax on power earnings.”

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