UK GDP progress to lag G7 nations in subsequent 18 months, says OECD

The UK is set to be among the G7 nations with the slowest growth this year and next, according to the OECD’s latest forecasts.

GDP is expected to ‘remain sluggish’ at 0.4 per cent in 2024 before rising to 1 per cent by 2025.

It is the slowest growth of every other G7 economy apart from Germany, which is expected to grow 0.2 per cent this year and 1.1 per cent in 2025.

The OECD said UK GDP is expected to grow just 0.4% in 2024 and 1% in 2025

However the OECD said that momentum in is improving with 0.1 per cent growth in UK GDP in February after a 0.3 per cent rebound in January.

Retail sales and mortgage lending have both started to recover, though have not reached pre-pandemic levels just yet.

While inflation continues to fall, it is expected to remain sticky at 3.3 per cent in 2024, before falling to 2.5 per cent in 2025, the OECD predicts.

The latest CPI reading came in at 3.2 per cent, but economists warn it could stay at this level for some time, following in the footsteps of the US.

The big question for policymakers is when interest rates will start to be cut. There is speculation that the Bank of England could start to ease monetary policy as soon as June, which will be a welcome relief for homeowners.

OECD predicts UK rate cut in third quarter 

However, the OECD said that it predicts rates will start to be cut in the third quarter, with the central bank gradually lowering the base rate from 5.25 per cent to 3.75 per cent by the end of 2025.

However tax receipts will ‘keep rising towards historic highs of about 37 per cent of GDP’ as National Insurance cuts make just a small dent in the impact of the frozen income tax thresholds.

Public expenditure is expected to be 2.9 per cent of GDP higher by 2028/29 than before the pandemic.

Chancellor Jeremy Hunt said: ‘This forecast is not particularly surprising given our priority for the last year has been to tackle inflation with higher interest rates. 

‘But now we are winning that war, growth matters which is why it is significant that last month the IMF predicted the UK will grow faster over the next 6 years than any European G7 country or Japan. 

‘To sustain that we need to stick to our plan – competitive taxes, a flexible labour market and far-reaching welfare reform.’

Elsewhere, the US is expected to grow its GDP by 2.6 per cent in 2024 and 2.2 per cent in 2025.

Global GDP is expected to grow 3.1 per cent in 2024, the same as in 2023, followed by a slight pick-up to 3.2 per cent in 2025.

Elsewhere, global unemployment is nearing its lowest levels since 2001 while real incomes are increasing as inflation starts to fall.

Headline inflation in the OECD is projected to fall from 5 per cent in 2024 to 3.4 per cent in 2025 as central bank action starts to be felt. It also predicts that by the end of next year, inflation will be back at central bank targets in most major economies.

The OECD has called on monetary policymakers to ‘remain prudent’ to ensure inflation continues to ease but said ‘scope exists to lower policy interest rates’ as it falls.

OECD Secretary-General Mathias Cormann said. ‘Policy action needs to ensure macroeconomic stability and improve medium-term growth prospects. 

‘Monetary policy should remain prudent, with scope to lower policy interest rates as inflation declines, fiscal policy needs to address rising pressures to debt sustainability, and policy reforms should boost innovation, investment and opportunities in the labour market particularly for women, young people and older workers.’

Debt burden is expected to rise if no action is taken and there is a need to improve public spending efficiency and optimise tax revenues, the OECD said.

‘The foundations for future output and productivity growth need to be strengthened by ambitious structural policy reforms to improve human capital and take advantage of technological advances,’ OECD chief economist Clare Lombardelli said.