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The UK is on course for “sluggish” growth that will lag most of its G7 peers, alongside a higher rate of inflation, according to a downbeat economic prognosis ahead of Thursday’s local elections.
Gross domestic product will increase by 0.4 per cent in 2024, a softer expansion than in any other G7 economy apart from Germany, before growing by 1 per cent in 2025, the OECD said in its economic outlook.
Inflation will run at 2.7 per cent this year, the highest pace in the group of nations, according to the Paris-based forecaster, before receding to 2.3 per cent in 2025.
UK Prime Minister Rishi Sunak is counting on robust GDP growth this year and slowing inflation to deliver a morale boost to the electorate as he attempts to curb the opinion poll lead of the opposition Labour party.
Elections are being held in 107 local authorities in England on Thursday, alongside a number of other votes including mayoral elections. A UK national vote is expected by the end of the year.
Chancellor Jeremy Hunt last month told the Financial Times that the prospect of Bank of England interest rate reductions this year, plus recent reductions in national insurance contributions, would “be felt in people’s pockets” by autumn. He added: “That’s clearly something that is significant for us.”
He hinted at further reductions to taxes before the general election, if there was budgetary capacity to do so.
But the OECD’s UK growth forecast, which was a downgrade from its February prediction of 0.7 per cent expansion in 2024, comes after a similarly downbeat assessment by the IMF, which last month trimmed back its outlook for the UK.
While the UK is on course to exit a shallow technical recession recorded in the second half of last year, the OECD found that consumers would be held back by “sticky” services prices inflation and a rising tax burden.
“Soft external demand will constrain trade growth, and policy uncertainty will impede business investment,” it added.
With the Bank of England’s Monetary Policy Committee due to convene next week to set rates, the OECD predicted the central bank would start cutting its key rate in the third quarter of the year, taking it from 5.25 per cent to 3.75 per cent by the end of 2025.
This will begin to alleviate pressure on living standards, but the organisation warned that households would at the same time see a rising tax burden, heading towards historic highs of 37 per cent of GDP this decade.
This is because the decision to lop four points off the main rate of national insurance “only partially offsets the ongoing fiscal drag from frozen personal income tax thresholds”, the OECD said.
With Hunt hinting at further cuts to personal taxes, the organisation urged the UK to persevere with consolidation to “rebuild fiscal buffers” as it predicted public debt would hover above 100 per cent of GDP in 2025.
“Fiscal prudence is required as inflation remains above target, and spending is to be directed towards supply-enhancing investment, including infrastructure, the National Health Service and adult skills,” the OECD recommended.
Responding to the forecast, Hunt said the outlook was unsurprising given the priority has been to “tackle inflation with higher interest rates”.
“But now we are winning that war,” he said. “To sustain that we need to stick to our plan — competitive taxes, a flexible labour market and far-reaching welfare reform.”