Britain’s economic growth will stop next year, and only Russia, plagued by Western sanctions, will perform worse than the G20’s, the OECD forecast.
The Paris-based agency’s forecasts highlighted the impact of still high UK inflation in 2023, along with further tax hikes, to strain household and business incomes as a major driver of Britain’s projected weaker economic activity.
The forecast highlights the challenges that weakened Prime Minister Boris Johnson will face in the months to come after surviving a no-confidence vote on Monday, bolstering Conservative support and showing the government can effectively manage the economy.
The OECD’s chief economist, Laurence Boone, said the UK’s economy is weak compared to other wealthy countries, making it a unique country to experience high inflation, rising interest rates and rising taxes at the same time.
“Inflation is high compared to other OECD countries in the G20. . . That’s one thing. The other is, obviously, there is a quick monetary tightening to counteract it. [the inflation] We also have the highest fiscal consolidation in the G7,” he said.
“Manufacturing is sensitive to global supply chains and there is a bit of Brexit. [in explaining the poor performance] Although we can’t specifically unravel each of these factors.”
The OECD expected the UK economy to grow at 3.6% in 2022, but most of that reflected a recovery from the coronavirus at the end of last year.
However, this growth is set to drop to zero next year as households are increasingly squeezed. Inflation will remain high and average 7.4% next year, reaching double digits at the end of the year. The OECD said the economy will contract in 2023 due to weak demand.
There are many risks, and most said that if these risks materialize, they will make the situation worse. “The higher-than-expected energy prices in the aftermath of economic sanctions and the prolonged war in Ukraine, and the worsening public health situation posed by the novel coronavirus strain are serious downside risks,” the report said.
Higher-than-expected commodity and energy prices could further reduce real incomes and there is no guarantee that the Bank of England will be able to quickly bring inflation back to its 2% target, he added.
“A sharp supply and prolonged labor shortage could permanently reduce the ability of businesses to operate or further fuel wage inflation,” the OECD said.
The organization said it expected the BoE to raise rates to 2.5% from the current 1% as a result of significant inflationary pressures. Unlike all other developed countries except the United States.
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