The UK is facing the worst downturn of major economies next year and is set for a recession which much of the rest of the world will avoid, according to a new report from the Organisation for Economic Co-operation and Development (OECD).
The global economic thinktank sharply downgraded its forecasts for the UK economy, predicting it will shrink by 0.4 per cent in 2023 and grow by just 0.2 per cent in 2024. As recently as September, it was expecting GDP to flatline next year.
And it warned of the risk of a deeper downturn if consumers respond to spiralling energy and housing costs by reining in spending, taking demand out of the economy, while strikes and labour shortages could push prices up further by fuelling wage inflation.
The OECD blamed worker shortages and “untargeted” energy support for painful inflation, forecast to peak at the end of this year around its current level of 11.1 per cent and remain above 9 per cent into early 2023, before slowing to 4.5 per cent by the end of next year and 2.7 per cent in 2024.
Its report sees UK interest rates rising further from 3 per cent currently to 4.5 per cent by April next year, while unemployment will lift from 3.6 per cent to 5 per cent by the end of 2024.
Among the G7 group of most developed nations, only Germany is expected to join the UK in seeing a contraction in national income next year, with GDP falling by 0.3 per cent.
By contrast, the United States will enjoy an expansion of 0.5 per cent, with GDP set to rise by 0.6 per cent in France, 1 per cent in Canada and 1.8 per cent in Japan.
And the OECD said that much of the rest of the world will dodge the recession which the Bank of England and Office for Budget Responsibility expect to stretch into 2024 in the UK.
OECD interim chief economist Alvaro Santos Pereira said the world was currently facing “a very difficult economic outlook” but that global growth is nonetheless forecast to be 2.2 per cent in 2023.
“Our central scenario is not a global recession, but a significant growth slowdown for the world economy in 2023, as well as still high, albeit declining, inflation in many countries,” he said.
Labour Treasury spokesperson Abena Oppong-Asare said: “That Britain’s economy will suffer the biggest hit from energy crisis among G7 nations is a direct result 12 years of Tory failures on both our energy and our economic security.
“They’ve failed to secure our economy and get it growing which has left us exposed to any external shocks.
“They haven’t delivered on the renewables or nuclear we need for energy independence, they cut our gas storage and they didn’t regulate the market leading to companies going bust and families footing the bill.”
The OECD took aim at the government’s decision to cap domestic energy bills at an average £2,500 until April, saying it will force up inflation and interest rates.
It said: “The untargeted Energy Price Guarantee announced in September 2022 by the Government will increase pressure on already high inflation in the short term, requiring monetary policy to tighten more and raising debt service costs.
“Better targeting of measures to cushion the impact of high energy prices would lower the budgetary cost, better-preserve incentives to save energy, and reduce the pressure on demand at a time of high inflation.”
But prime minister Rishi Sunak’s official spokesperson told reporters that the government had already amended how the scheme will function from April, lifting the cap to an average £3,000 and focusing funds more tightly on those at greatest need.
“We’re taking a different approach post-April to the energy support, targeting it towards the most vulnerable,” said the spokesperson.
Responding to the bleak OECD forecast for the next two years, he pointed out that the UK was top of the G7 table for growth this year, adding: “These are challenges that are affecting different countries at slightly different times.”
Today’s report warned that the UK’s economic prospects could be even worse than forecast.
“Risks to the outlook are considerable and tilted towards the downside,” it said.
“Higher-than-expected goods and energy prices could weigh on consumption and further depress growth.
“A prolonged period of acute labour shortages could force firms into a more permanent reduction in their operating capacity or push up wage inflation further.”
But it said households may choose to return to the jobs market to help boost stretched finances.
“While households may seek to boost their real income by striking for stronger wage increases, they may also increase their labour supply either by returning from inactivity or by increasing working hours, which would be an upside risk,” said the report.
