Britain is set to suffer the highest inflation and the second-slowest growth rate of the G7 group of advanced economies, according to a major forecast.
The Organisation for Economic Co-operation and Development (OECD) has slashed its economic growth forecast for the UK while increasing its expected inflation rate.
The forecaster said the economy will grow by just 0.5 per cent this year, making it the worst-performing of all other G7 countries bar Germany. Growth will average just 0.7 per cent next year – downgraded from an earlier forecast of 0.8 per cent – followed by an expected economic uptick to 1.2 per cent in 2025.
Inflation – the rate at which prices are rising – is set to average 7.3 per cent across this year, compared with an earlier forecast of 7.2 per cent. It is then expected to fall to 2.9 per cent next year, and 2.5 per cent the year after.
The figures represent a major blow to Rishi Sunak and Jeremy Hunt just a week after ministers claimed the economy had turned a corner. And they present a challenge to Mr Sunak’s claims that there is “positive momentum” behind the economy.
They mean households still face grappling with spiralling prices, while Britain’s economy is outgrown by other G& countries including France, Italy, the US, Canada and Japan.
In its report, the OECD said: “Growth in the major European economies, which have been relatively hard-hit by the energy price shock in 2022 and the war in Ukraine, is expected to remain weak in the near term but improve gradually as inflation wanes, monetary policy easing gets underway and real incomes recover.
“In the United Kingdom, GDP growth is projected to be subdued, with higher fiscal pressure weighing on household disposable incomes, but to improve from 0.5 per cent in 2023 to 0.7 per cent in 2024 and 1.2 per cent in 2025.”
The forecast comes after the governor of the Bank of England said the UK’s growth outlook is the worst he has ever seen.
Andrew Bailey offered a scathing assessment of Britain’s future, saying interest rates will remain at 15-year highs and the rate at which inflation is falling will slow markedly this month.
In an interview with Newcastle upon Tyne’s Chronicle Live, Mr Bailey said: “If you look at what I call the potential growth rates of the economy, there’s no doubt it’s lower than it has been in much of my working life.
“It does concern me that the supply side of the economy has slowed. It does concern me a lot.”
The slowdown in inflation and rising wages is expected to boost spending in the UK, but higher borrowing costs are weighing on the housing market and business investment.
Meanwhile, the growing tax burden is squeezing household incomes, the OECD said.
The Bank of England kept interest rates at 5.25 per cent earlier this month and has insisted that it is too early to think about cutting rates.
Heightened geopolitical tensions are also adding to uncertainty about the outlook in the near term, with the Israel-Hamas conflict raising concerns over disruption to energy markets and trade routes, according to the top economists.