Britain will suffer the highest inflation of the G7 group of advanced economies this year and next, new forecasts show.
The Organisation for Economic Co-operation and Development (OECD) lowered its predictions for headline UK inflation to an average of 2.8 per cent in 2024 and 2.4 per cent in 2025, from the 2.9 per cent and 2.5 per cent respectively forecast in November.
But this would still see the UK suffer the highest level of inflation of all the G7 countries, which include Canada, Italy, Japan, Germany, France and the US, in both 2024 and 2025.
The OECD also downgraded its forecasts for Britain’s economic growth, meaning the UK economy will be the third-worst performer this year. Just France and Germany are expected to grow less than Britain, while Britain’s economy will grow at the same rate as Italy.
The latest figures are a fresh headache for Rishi Sunak as the general election, expected this autumn, approaches. It means the country will be going to the polls amid a period of sluggish economic performance and inflation still above the Bank of England’s 2 per cent target.
Jeremy Hunt and Rishi Sunak will hope next month’s Budget can revive Britain’s sluggish economy
Jeremy Hunt is expected to cut taxes in a bid to spur growth with next month’s Budget, but he has warned his scope for lowering the tax burden is limited.
The Liberal Democrats said that “yet again the Conservative government is top of the table for price rises and near the bottom for economic growth”.
Treasury spokesperson Sarah Olney said: “Conservative ministers trashed our economy and left families to clear up their mess. This verdict on their economic performance is yet more proof the prime minister and his chancellor aren’t fit to hold the key to the Treasury.”
In 2024, The OECD is predicting that UK inflation to be above Canada at 2.6 per cent, France at 2.7 per cent, Germany at 2.6 per cent, Italy at 1.8 per cent, Japan at 2.6 per cent and the United States at 2.2 per cent.
And while the OECD said inflation is projected to be back to target across most G20 countries by the end of next year, it warned over the risk to inflation globally from geopolitical tensions and the Red Sea shipping disruption.
It also downgraded its UK growth forecast for 2023 to 0.3 per cent from 0.5 per cent previously predicted in November, but held firm on its forecasts for Britain’s gross domestic product (GDP) to expand by 0.7 per cent in 2024 and 1.2 per cent in 2025.
The OECD said central banks could start to lower interest rates in 2024 and sooner than it had predicted in November, although it warned that monetary policy must be “prudent”.
It added that it is “too soon to be sure that underlying price pressures are fully contained”.
High geopolitical tensions are a significant near-term risk to activity and inflation, particularly if the conflict in the Middle East were to disrupt energy markets
OECD secretary-general Mathias Cormann said: “Monetary policy needs to remain prudent, though central banks could start to lower interest rates this year, provided that inflation continues to ease.”
The organisation flagged concerns over the Israel-Gaza conflict and attacks on ships in the Red Sea by Houthi rebels, which has seen US and UK forces respond with strikes against the rebels.
“High geopolitical tensions are a significant near-term risk to activity and inflation, particularly if the conflict in the Middle East were to disrupt energy markets,” it said.
“A widening or escalation of the conflict could disrupt shipping more extensively than presently expected, intensify supply bottlenecks, and push up energy prices if traffic is interrupted in the key routes for the transport of oil and gas from the Middle East to Asia, Europe and the Americas,” it added.
The Bank of England last week also flagged worries over the Red Sea attacks in affecting the outlook for inflation, though it said the impact to the UK has so far been small.
The Bank signalled on Thursday as it kept interest rates at 5.25 per cent that it could start thinking about cutting borrowing costs this year, though it also stressed the job of reining in inflation is not done.
In its latest report, the OECD said global central bank policies “should remain restrictive for some time to come”, suggesting that policymakers should not cut rates too quickly or too far.
Its growth forecasts see the UK with the joint third weakest expansion of the G7 countries, falling far short of the 2.1 per cent pencilled in for the US.
Germany is set for the weakest expansion in the G7 this year, at just 0.3 per cent, followed by France at 0.6 per cent and then both the UK and Italy at 0.7 per cent, according to the OECD.
