The west’s leading economic thinktank has raised its outlook for the UK this year, in a boost to Philip Hammond ahead of his budget. But the Organisation for Economic Cooperation and Development said it still expected Britain’s economy to shift down a gear compared with last year as rising inflation hits households.
The Paris-based organisation predicts that after expanding 1.8% in 2016, the UK economy will grow 1.6% this year. That is faster than the 1.2% it was predicting in late November. It made no changes to its earlier forecast for growth to slow further in 2018 to just 1% – which would be the weakest performance since the depths of the global financial crisis in 2009. It also highlighted rapid house price growth in the UK and other countries as a potential warning sign of another economic downturn.
The thinktank’s upgrade for the UK came ahead of the chancellor’s spring budget on Wednesday, when he is expected to unveil a brighter outlook for the economy and public finances while making the case that he must keep back any extra money to help the UK weather uncertainties from the Brexit process.
The OECD did not single out Hammond, but used its interim economic outlook on Tuesday to urge all governments to make the most of any fiscal wriggle room they have to support economic growth and to tackle inequality. It called on policymakers to use a mix of state spending and underlying reforms in areas such as job markets.
It also renewed its warning that a new wave of protectionism risks derailing a modest pick-up in global growth expected this year.
“Growth is still too weak and its benefits too narrowly focused to make a real difference to those who have been hit hard by the crisis and who are being left behind,” said the OECD’s secretary general, Ángel Gurría.
“Now, more than ever, governments need to take actions that restore people’s confidence while at the same time resisting turning inwards or rolling back many of the advances that have been achieved through greater international cooperation.”
The new forecasts envisage the UK economy performing in line with the eurozone economy, where GDP is also expected to expand by 1.6% in 2017. The US economy, helped by an expected rise in spending under Donald Trump’s administration, is forecast to grow 2.4% this year.
Following June’s referendum result, the OECD was, like many forecasters, forced to backtrack on its earlier warning that the UK would suffer instant damage from the Brexit vote. Its latest upgrade to the 2017 outlook follows official figures suggesting the UK economy ended 2016 on a strong note.
However, the tone of the thinktank’s interim outlook chimed with more recent UK indicators that suggest households are reining in spending as a weakening pound raises prices. The currency’s fall since the Brexit vote has made imports more expensive and some of that is being passed on to consumers.
The OECD report said: “In the United Kingdom, the pace of expansion in 2016 was lower than in previous years, despite support from resilient household spending, actions by the Bank of England and adjustment to the fiscal stance following the Brexit vote.
“UK growth is expected to ease further as rising inflation weighs on real incomes and consumption, and business investment weakens amidst uncertainty about the United Kingdom’s future trading relations with its partners.”
Its outlook for the world economy remained unchanged from November, with global growth pencilled in at 3.3% this year. That would be faster than the 3% in 2016, but below the historical average of about 4% in the two decades before the global financial crisis.
The OECD said there were various risks to global growth, including what it called “disconnects” between rallying financial markets and economic reality. Against the backdrop of recent record highs for stock markets in the US and UK, it noted the market mood did not reflect the true economic outlook.
In the wake of Trump’s plans to roll back trade deals, it also warned that rising protectionism could “hurt global growth and impact the large number of jobs that depends on trade”.
The report sought to flag up “vulnerabilities” in some richer nations where exceptionally low interest rates have been accompanied by rising house prices.
“Some countries have experienced rapid house price increases in recent years, including Australia, Canada, Sweden and the United Kingdom. As past experience has shown, a rapid rise of house prices can be a precursor of an economic downturn.”