A leading international forecaster has given the UK economy the largest annual growth upgrade of the G7 in this year, a boost for the government’s efforts to kickstart its economy. The Organisation for Economic Cooperation and Development (OECD) said in its latest outlook for the world economy that the UK economy is on track to grow by 1.1% this year. This represents an increase of 0.7 percentage point from the last forecast made in May.
The OECD expects UK growth next year to be 1.2 percent, 0.2 points higher than this year. The Paris-based organization, which consists of the most advanced economies in the world, stated that the UK was one of a group of nations recording “robust growth rates” this year. Activity is expected to bounce back strongly following a mild depression at the end 2023.
These figures are good news for Labour who made it one of their goals to achieve the highest growth rate in the G7. Rachel Reeves said, “Faster growth numbers are welcome but I know that there is more work to be done and this is why economic development is the top priority of the government.” The next budget will focus on fixing the foundations so that we can deliver the promise of change, and rebuild Britain.
Japan is on course to be the worst-performing advanced economy this year, with a contraction of -0.1% forecasted. Germany, however, will record a modest 0.1 per cent growth, according to the OECD. The OECD stated that Japan will be the worst performing advanced economy in 2018, with a predicted contraction of -0.1%, while Germany should record a modest 0.1 rate of growth.
The body warned that the UK’s higher growth rates will be accompanied by an increase in inflation. It estimates core inflation to rise by 0.4 percentage point this year, to a mean of 3.7 percent, and then 0.3 percentage points in 2025 at 2.8 percent. The OECD noted that more than half the items in the UK consumer price basket continue to rise by more than 3% on an annual basis.
The OECD stated that this indicates some lingering underlying forces. The OECD said that services price inflation was still very high and only gradually abating. If core goods inflation stays at its current rate, aggregate services price inflation could need to fall by… 2.5 percentage points per year in the United Kingdom to bring core inflation to the target rate.
In August, the Bank of England reduced interest rates just once, falling behind other countries like the US and Eurozone where authorities have already lowered borrowing costs by up to 50 basis points due to a slowing of inflation. The UK is expected to reduce interest rates by one quarter point before the end year. This would bring the base rate down to 4.75 percent and boost the pound’s value against other currencies.
Earlier this week, the OECD warned that the new government must take “significant actions” in order to stabilize the public finances, due to “increasing pressures on spending” from increasing health, pension, and climate change costs.
The OECD’s interim forecast did not mention the UK, but it said that the majority of advanced economies should “intensify their” fiscal consolidation, as “the monetary stance is less restrictive”, provided the growth rate does not fall substantially.
The report added that “priorities vary across countries but many of them include the need for better targeting of benefits and subsides, as well as further reforms of pension entitlements to take into account the increasing longevity.”
Many countries are calling for efforts to reduce distorting tax expenditures, and increase revenues from indirect taxes, environmental taxes, and property taxes. This would increase tax revenues and the tax base, and provide money to meet new spending requirements and improve the tax system.
Alvaro Pereira is the chief economist of the OECD. He said that it was “crucial”, for the UK, to increase investment. The OECD suggested that the government change the current fiscal rules to allow longer-term expenditures rather than “short termism” in order to stabilize the public finances.
The UK’s current rules could lead to short-termism, and a possible deterioration in public finances over time.
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