The Organisation for Economic Cooperation and Development’s (OECD) latest report, published this morning, downgrades Britain’s growth prospects this year: from 0.7 per cent (forecast in November last year) to 0.4 per cent. Based on the OECD’s Economic Outlook, Britain and Germany risk experiencing the least growth amongst advanced economies, with Germany coming last this year (with 0.2 per cent growth) and the UK coming last next year (with 1 per cent growth).
In response to this morning’s downgrade, Chancellor Jeremy Hunt has said that the ‘forecast is not particularly surprising given our priority for the last year has been to tackle inflation with higher interest rates’. This is a point made by the OECD as well: that the ‘waning drag from past monetary tightening’ has been keeping the lid on the UK’s ability to grow.
This, of course, was part of the plan: raising interest rates and taking heat out of the economy was necessary to tame inflation. The consequence was always likely to be lacklustre growth. Still, price spirals have not been a problem unique to Britain, and its ranking at the bottom of the G7 pack does not speak well to the promise of pro-growth reforms that simply have not materialised.
While growth downgrades are never good news, it would be a mistake to exaggerate the change. The picture wasn’t rosy before – and it hasn’t been for some time. All the predictions from the big forecasters put Britain’s growth figures in the same, broad ballpark: growing under 1 per cent this year and then growing somewhere between 1 and 2 per cent next year (the OECD forecasts 1 per cent, the IMF forecasts 1.5 per cent, and the Office for Budget Responsibility forecasts 1.9 per cent).
Of course a growth rate closer to 2 per cent would be better than 1 per cent. But while no one is predicting that the UK economy will take off, nor is anyone predicting that the recession extends into 2024. Indeed, the OECD notes that ‘momentum is improving’ in Britain, as upticks in monthly GDP figures in both January and February are ‘foreshadowing a moderate pick-up in the first quarter of 2024’ that takes the UK out of its technical recession from last year.
The OECD seems to have adjusted for falling market expectations around interest rate cuts. ‘Monetary policy is assumed to start easing from the third quarter of 2024,’ the report reads, ‘with bank rate gradually lowered from its current peak of 5.25 per cent to 3.75 per cent by the end of 2025.’ This reflects the extent to which central bankers have been lowering expectations around cuts this year: inflation in the United States rose slightly in the year leading to March, and the Bank of England is preparing for inflation to fall to, but then rise again from, its target of 2 per cent. Some kind of cut is still expected this year, but it may come later, and be smaller, than many were hoping it would be.
That group of hopefuls includes ministers, who remain desperate to head into an election with slightly less restrictive monetary policy. Ideally those renewing their mortgages this summer would be noticing a change in cost thanks to lower interest rates, while voters more broadly might feel the economy picking up pace.
It’s a harsh reminder that many of the decisions affecting the economy sit outside the government’s remit and what it does control (the ability to usher in supply-side reforms like planning overhaul or public sector reform) it has barely utilised.
Will Britain ever escape the low growth trap?
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02.05.2024
The Organisation for Economic Cooperation and Development’s (OECD) latest report, published this morning, downgrades Britain’s growth prospects this year: from 0.7 per cent (forecast in November last year) to 0.4 per cent. Based on the OECD’s Economic Outlook, Britain and Germany risk experiencing the least growth amongst advanced economies, with Germany coming last this year (with 0.2 per cent growth) and the UK coming last next year (with 1 per cent growth).
In response to this morning’s downgrade, Chancellor Jeremy Hunt has said that the ‘forecast is not particularly surprising given our priority for the last year has been to tackle inflation with higher interest rates’. This is a point made by the OECD as well: that the ‘waning drag from past monetary tightening’ has been keeping the lid on the UK’s ability to grow.
This, of course, was........
© The Spectator
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