Inflation exacerbated by worker shortages and misdirected energy support will cause the UK economy to contract more than any other among the seven most advanced nations next year, a report says.
A sharp downgrade for the UK economy — which is expected to shrink by 0.4 per cent in 2023 and grow by only 0.2 cent in 2024 — is forecast by the Organisation for Economic Co-operation and Development.
Growth is also predicted to flatten out in September 2023.
Germany is the only other G7 country set for a contraction in gross domestic product next year, with a 0.3 per cent drop, the report says.
Italy will see only paltry growth of 0.2 per cent, while the US will eke out 0.5 per cent expansion. GDP is set to rise by 0.6 cent in France, 1 per cent in Canada and 1.8 per cent in Japan.
The UK is also the third worst performing nation of all the G20 advanced countries, with only Russia and Sweden having a bigger decline in GDP, at 5.6 per cent and 0.6 per cent.
UK's finance minister says he is focused on bringing down inflation as economy shrinks - video
UK's finance minister says he is focused on bringing down inflation as economy shrinks
Compared with the average of all the world economies, the UK’s performance is set to trail behind the 2.2 per cent in global growth predicted for next year.
But this is still a sharp slowdown on the 3.1 per cent expected in 2022 because of the energy crisis and trading sanctions sparked by Russia’s war on Ukraine.
The OECD also took aim at the UK government’s support efforts to cap energy bills at about £2,500 ($2,955) until April.
It said they would push up inflation and mean households and businesses would be hit by higher interest rates as a result, as policymakers look to rein in price and wage rises.
“The untargeted energy price guarantee announced in September 2022 by the government will increase pressure on already high inflation in the short term, requiring monetary policy to tighten more and raising debt service costs," it said.
“Better targeting of measures to cushion the impact of high energy prices would lower the budgetary cost, better preserve incentives to save energy, and reduce the pressure on demand at a time of high inflation.”
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The UK's official forecaster, the Office for Budget Responsibility, last week said Britain’s economy would shrink by 2 per cent over a long recession that started in the third quarter.
It downgraded earlier projections that the economy would grow by 1.8 per cent in 2023 to a fall of 1.4 per cent for the year.
The OECD said UK inflation – which hit a 41-year high of 11.1 per cent in October – will probably peak at the end of this year and remain above 9 per cent into early 2023.
It will then slow to 4.5 per cent by the end of next year and to 2.7 cent by the end of 2024, the organisation said.
Its report says UK interest rates will rise further from 3 per cent currently to 4.5 per cent by April next year, while unemployment will lift from 3.6 per cent to 5 per cent by the end of 2024.
“Risks to the [UK's] outlook are considerable and tilted towards the downside," the OECD said.
“Higher-than-expected goods and energy prices could weigh on consumption and further depress growth.
“A prolonged period of acute labour shortages could force firms into a more permanent reduction in their operating capacity or push up wage inflation further.”
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But it said households might choose to return to the jobs market to help boost stretched finances.
“While households may seek to boost their real income by striking for stronger wage increases, they may also increase their labour supply either by returning from inactivity or by increasing working hours, which would be an upside risk,” the OECD said.
While the UK is facing a prolonged recession, the organisation believes the world economy will avoid the same fate.
“We are currently facing a very difficult economic outlook," said its interim chief economist, Alvaro Santos Pereira.
“Our central scenario is not a global recession, but a significant growth slowdown for the world economy in 2023, as well as still high, albeit declining, inflation in many countries.”
The OECD warned that “risks remain significant”.
“In these difficult and uncertain times, policy has once again a crucial role to play, further tightening of monetary policy is essential to fight inflation, and fiscal policy support should become more targeted and temporary.”
The UK's shadow exchequer secretary to the Treasury, Abena Oppong-Asare, said it was a “direct result of 12 years of Tory failures on both our energy and our economic security”.
“They’ve failed to secure our economy and get it growing, which has left us exposed to any external shocks,” the Labour MP said.
