The UK will be the only economy in the G20 apart from Russia to shrink this year as high inflation, the energy crisis and low productivity hinder its recovery, according to a leading international institution.
The Organisation for Economic Co-operation and Development (OECD) said all major EU economies will expand in 2023 at a stronger pace than it had forecast last year, leaving Britain and Russia the only members of the G20 group of wealthy nations to suffer a decline.
In its half-yearly outlook, the Paris-based organisation said the UK economic outlook had improved slightly compared with its forecast in November of a 0.4% contraction, largely in response to falling gas prices, but would still shrink by 0.2% this year.
Germany’s economy was expected to contract this year by 0.3% but the EU’s largest economy has recovered quickly from its dependence on Russian gas and global shortages of raw materials and is now forecast to grow by 0.3%.
Under the heading “a fragile recovery”, the OECD said it expected to see a further rebound in consumer confidence and business output this year across its 39 member countries – who include other countries in the G20 such as Mexico, Indonesia, South Korea and the US, but not Russia, plus other smaller countries such as EU states – although from low levels in 2022 when the shock from Ukraine was at its height.
It said there were “more positive signs” now that food and energy prices were falling back, and the Chinese economy had fully reopened.
However, the slow recovery from the coronavirus pandemic would continue while central banks kept interest rates high and the Ukraine war persisted.
“Global growth is projected to remain at below trend rates in 2023 and 2024, at 2.6% and 2.9% respectively, with policy tightening continuing to take effect. Nonetheless, a gradual improvement is projected through 2023-24 as the drag on incomes from high inflation recedes,” it said.
Last year the organisation said the UK would be the economy hit hardest by the Ukraine war.
The OECD said it was concerned that services companies were pushing through strong price increases, which it blamed in part on a lack of competition in many of its member countries.
Álvaro Pereira, the organisation’s interim chief economist, said that he supported central banks maintaining high interest rates to bear down on inflation.
Unlike the economic forecasts for the UK by the Office for Budget Responsibility (OBR), the OECD expects growth in the UK to remain weak next year, rising to only 0.9%. The OBR, which provides independent forecasts for the Treasury, said earlier this week it estimates the UK economy will grow by 1.9%.
The UK has one of the highest rates of inflation, the biggest reliance on gas and the lowest labour productivity – defined as output per hour – among its major competitors, Pereira said.
Inflation in the UK is expected to fall from above 10% this year, higher than France, Spain, the US and Japan, to be among the lowest in the G20 by the end of the year at below 3%.
Pereira, said the situation in the UK “will be difficult over the next few months as the economy contracts” before a recovery in consumer spending and business investment in the second half of 2023 and 2024 that will spur a modest turnaround.
There are wide gaps between the forecasts for the UK next year by the OECD, the OBR and the Bank of England, which expects GDP growth to be only 0.4% in 2024.
The OBR said this week it was more optimistic mainly because of government policies outlined in the budget to bring workers back into the labour market and a judgment that household savings accumulated during the pandemic will be spent in an effort to maintain living standards.
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