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The UK will be the second worst performing economy in the G20 next year after its growth projections were downgraded and its inflation forecasts raised by the Organisation for Economic Co-operation and Development.
The OECD’s latest interim forecast cut the UK’s expected growth rate to 0.8 per cent in 2024, from an earlier estimate of 1 per cent, as a result of restrictive monetary policy that will keep the brakes on the economy next year. The expansion is on course to be the second worst in the G20 grouping after Argentina, which is projected to contract by 1.2 per cent, and match the 0.8 per cent growth forecast for Italy.
The organisation, which is based in Paris, also downgraded its outlook for the global economy, with China, Germany, France and the wider eurozone also not expanding as fast as expected next year.
Most economies, the organisation said, would struggle to generate growth momentum under the weight of high core inflation and restrictive monetary policy, which central banks have warned will persist into next year.
“Uncertainty about the strength and speed of monetary policy transmission and the persistence of inflation are key concerns,” the forecast said. “The adverse effects of higher interest rates could prove stronger than expected, and greater inflation persistence would require additional policy tightening that might expose financial vulnerabilities.”
The US Federal Reserve and Bank of England will decide this week whether to carry out another interest rate rise or keep their borrowing costs steady amid signs that inflationary pressures are subsiding and labour markets are cooling. The European Central Bank raised its three benchmark interest rates last week and signalled that it would be the final increase after more than a year of aggressive action to combat inflation.
The British economy is on course to expand at a rate of 0.3 per cent this year, unchanged from a previous forecast in June and the second slowest in the G20 after Germany, which is expected to contract by 0.2 per cent, according to the interim forecast.
The United States, which is embarking on a huge programme of federal spending on green industry, was the only G7 economy to get a double growth upgrade this year and next, with new projections saying the US will grow at 0.6 percentage points faster this year at 2.2 per cent, and 0.3 percentage points faster in 2024 at 1.3 per cent.
The OECD said that headline consumer price inflation in the UK would now average at 7.3 per cent across the year, 0.2 percentage points higher than in its last forecast made in June and worse only than Turkey and Argentina in the G20 this year, where inflation is projected to be 52.1 per cent and 118.6 per cent respectively.
Core inflation, which strips out volatile elements such as food and energy and is closely watched by rate-setters, would be 1 percentage point higher this year, averaging at 6.3 per cent, before falling to an average of 3.8 per cent in 2024, according to the projection.
The OECD expects the UK inflation rate next year to be 2.9 per cent, a 0.1 percentage point upgrade on its June forecast.
Jeremy Hunt, the chancellor, said: “Today the OECD have set out a challenging global picture, but it is good news that they expect UK inflation to drop below 3 per cent next year.
“It is only by halving inflation that we can deliver higher growth and living standards. We were among the fastest in the G7 to recover from the pandemic, and the IMF have said we will grow faster than Germany, France, and Italy in the long term.”
The OECD said: “Monetary policy needs to remain restrictive until there are clear signs that underlying inflationary pressures are durably lowered.
“This is likely to limit scope for any policy rate reductions until well into 2024 in most advanced economies. Some additional rate rises could still be needed where underlying inflation pressures are particularly persistent, but policy rates appear to be at, or close to, their peak in most economies.”
A renewed rise in global energy prices, sticky inflation, and a marked slowdown in China’s economic activity means that the initial bout of optimism about a recovery in global growth at the start of the year “may prove short-lived”, Clare Lombardelli, chief economist of the OECD and a former UK Treasury official, said.