UK’s growth prospects worst among top economies, OECD warns

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The UK’s economy is set to be the worst performer in the G20 bar Russia over the next two years, the OECD said on Tuesday as it warned that countries must continue to make fighting inflation their top priority.

The OECD said in its latest economic forecasts that UK GDP would fall by 0.4 per cent in 2023 and rise by a mere 0.2 per cent in 2024.

The Paris-based organisation also hit out at the UK government’s pledge to hold average household energy bills at £2,500 until April, saying this untargeted support would “increase pressures on already high inflation in the short term”, leading to higher interest rates and debt service costs.

The world economy, meanwhile, was “reeling” from the largest energy shock since the 1970s. The OECD’s latest forecasts showed growth in almost every large economy was set to be weaker next year than it thought in June, as persistently high inflation slashed people’s spending power.

While the outlook for the UK was strikingly bleak, the OECD expected growth next year of just 0.5 per cent in the US and the euro area, with Germany also falling into recession, and the more resilient emerging economies driving a global expansion of 2.2 per cent.

The organisation also warned that the current energy crisis was “here to stay”, with Europe facing even bigger risks next winter than it did now of gas shortages that could tip it into recession.

Although the OECD expected inflation to ease next year, especially in the US and Brazil, it thought consumer prices would rise by 6.8 per cent across the euro area in 2023 and 3.4 per cent in 2024.

“Fighting inflation has to be our top priority,” said Álvaro Santos Pereira, the OECD’s acting chief economist, arguing that central banks were “doing what they need to do” but that governments needed to scale back untargeted fiscal support that was adding to inflationary pressures.

“Inflation is definitely becoming a lot more entrenched . . . it will not come down as fast as we would like, Pereira said, adding: “We see light at the end of the tunnel, but it’s a long tunnel.”

The OECD levelled similar criticisms at France and Germany, among other countries, saying it would be crucial to phase out measures that kept energy prices artificially low for everyone — such as subsidies, price caps or tax breaks — and instead offer more targeted income support for vulnerable households.

It said, pointing to Germany in particular, this was because it was crucial to create incentives to save gas if Europe was to guard against energy shortages and an even worse economic shock next winter.

So far, helped by mild weather, gas storage levels have remained high across the EU. The OECD was assuming that significant disruption could be avoided if energy usage remained about 10 per cent below its five-year average, but said it was not clear whether demand could be met in a typical winter.

Pereira said replenishing storage capacity next year could prove more difficult if Chinese demand for LNG rebounded as Covid-19 lockdowns lifted, so that a cold winter could lead to shortages emerging. This could lead to high energy prices being much more disruptive and persistent.

“Europe would certainly be in recession this year if we had a cold winter . . . Next winter, the same could apply,” he said.



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