UK Outperforms Germany and Japan in Economic Growth Forecasts: OECD

The City of London financial district can be seen as people walk along the south side of the River Thames, in London, on March 19, 2021. Henry Nicholls/Reuters

The UK has outperformed several G7 nations in economic growth forecasts, yet it remains projected to have the highest inflation among the group, according to new report.

The Organisation for Economic Co-operation and Development (OECD) now ranks Britain the joint second in growth predictions for 2024 among G7 nations, expecting 1.1 percent growth, alongside Canada and France but behind the Unites States.

The interim report, published on Wednesday, also said that Britain’s economy will grow by 1.2 percent next year. The current forecast stands in contrast to the OECD’s previous analysis in May, which estimated growth of 0.4 and 1.0 percent for 2024 and 2025 respectively.

While Britain has jumped to the front of the G7 list in terms of growth, the forecast for its inflation increases sent the UK back to the bottom of the pile. The OECD’s prediction of 2.7 percent for 2024 means the UK is still the country in the G7 with the fastest-rising prices.

Next year, Britain’s inflation will rise by 2.4 percent, the report estimated.

The current inflation rate sist at 2.2 percent, slightly above the Bank of England’s (BoE) 2 percent target. The OECD noted that “lingering underlying pressures,” such as the rising cost of services, could continue affecting the headline inflation rate.

“Services price inflation is still proving particularly sticky and has abated only slowly. If core goods price inflation remains unchanged at the current rate, year-on-year aggregate services price inflation may need to decline by 2.5 percentage points in the United Kingdom,” the economic forum estimated in its report.

It added, however, that by the end of 2025, most G20 economies will manage to get inflation back to central bank targets. Core inflation in the G20 advanced economies will ease to 2.7 percent this year and 2.1 percent in 2025.

“Declining inflation provides room for an easing of interest rates, though monetary policy should remain prudent until inflation has returned to central bank targets” said Cormann.

Fiscal Policy and Reforms

Cormann’s recommendations align with the position of the BoE, cautious about slashing the interest rates “too fast or by too much.” The bank has long stressed that it will keep the monetary policy restrictive for as long as it takes for the inflation to “sustainably” remain at the 2 percent target.

In September, the BoE left UK interest rates unchanged at 5 percent, bringing no relief to many mortgage payers and first-time buyers.

Commenting on “spiralling mortgages” at the Labour Party conference this week, Chancellor Rachel Reeves vowed to “put money back in the pockets of working people.”

Reeves also welcomed the faster economic growth figures but added there is more be done to deliver the government’s mission of boosting the economy.  This comes ahead of the October budget, where she is expected to announce cuts to public spending and raise taxes.

The OECD urged Reeves to not just raise taxes but look at wider reforms of the tax system.

“While raising taxes will help to finance necessary spending, the government has to shift to solutions that make the tax system fairer and more effective to avoid unnecessary economic distortions, in particular with respect to investment and labour supply,” the OECD said in its annual economic survey.

Potential  reforms, according to the OECD, could include updating council tax, removing stamp duty land tax, broadening the VAT base and simplify the income tax system. Reeves said that the next month’s budget will be about “fixing the foundations” and delivering growth.

Robust trade growth in many G20 countries, including the UK, the US, Brazil, India and Indonesia, will see the global economy “turn the corner,” the OECD said. At 3.2 percent, the forum expects global growth to remain “resilient” in both 2024 and 2025.

PA Media contributed to this report.