Yet another forecaster has downgraded the outlook for the UK economy as it struggles with a cocktail of high borrowing costs and stubborn inflation.
New forecasts from the Organisation for Economic Co-operation and Development (OECD) project the UK to grow at 0.7 per cent next year and 1.2 per cent in 2025.
The OECD’s predictions for next year were a further downgrade on its September round when it lowered its expectations for the UK to grow by two percentage points to 0.8 per cent.
The forecasts also put the UK slightly behind the euro area, which is projected to grow at 0.9 per cent next year and 1.5 per cent in 2025. The US meanwhile will grow 1.5 per cent in 2024 and 1.7 per cent in 2025, according to the OECD.
Among G7 nations, only Germany will fare worse next year, growing at 0.6 per cent.
Much of the UK’s poor performance stems from inflation remaining above target for longer than expected.
“Core inflation will linger at 3.8 per cent in 2024 and 2.6 per cent in 2025 on the back of the tight labour market,” the OECD said. It noted that wage growth remains high, putting pressure on services inflation.
As a result, monetary policy will remain in restrictive territory in order to bear down on inflation across the UK economy.
“Monetary policy… is expected to remain tight until price pressures ease sustainably,” it said.
Various members of the Monetary Policy Committee (MPC) have stressed in recent weeks that interest rates will have to remain higher for longer than markets currently expect. Andrew Bailey, governor of the Bank, warned markets were “underestimating” the risks of persistent inflation.
The body highlighted that tighter monetary policy is already starting to work its way through the economy, as growth has slowed and lending contracts.
Fiscal policy will also move further into restrictive territory as the government attempts to meet its target of getting debt falling within five years.
“Energy support measures have been phased out and the energy price cap no longer binds. Fiscal pressure on households and businesses has increased significantly since the spring Budget, due to the freeze of income tax brackets and the corporate income tax rate increase,” it said.
Despite this, it warned that the government faces “urgent” fiscal challenges due to the backdrop of high borrowing and debt.
It suggested reforming the “costly” triple lock and called on the government to improve the conditions for net-zero investments, such as by reforming planning regulations.