The Organisation for Economic Cooperation and Development [OECD] has said that inflation and the energy crisis will see the UK suffer the most severe economic downturn within the G7 group of nations in 2023.
The UK and Germany are the sole two economies in the G7 projected to contract, while the OECD forecast weak growth in the US economy and the Eurozone as part of a “significant growth slowdown”.
The OECD predicts that the UK economy will shrink by 0.4 per cent next year, with growth of 0.2 per cent in 2024. German GDP is expected to contract by 0.3 per cent next year.
Meanwhile, the UK Office for Budget Responsibility [OBR] has forecast a greater contraction of 1.4 per cent in 2023, followed by more resurgent growth of 1.3 per cent the following year.
More broadly, the OECD’s report projects that the global economy will grow by 2.2 per cent overall thanks to emerging economies.
European economies, it says, will suffer the worst consequences as a result of the war in Ukraine and rising energy costs.
Outlining the factors behind the projected economic performance of the UK, the OECD says that the Energy Price Guarantee supporting households with rising costs is largely to blame.
While government subsidising of energy bills will help reduce inflation, the OECD expects this to add to overall demand in the economy and increase inflation in the medium-term.
The knock-on effect, it says, will see the Bank of England increase interest rates further.
In its report, the OECD says that “better targeting of measures” to ease the effect of high energy prices would “lower the budgetary cost, better-preserve incentives to save energy, and reduce the pressure on demand at a time of high inflation.”
Indeed, the OECD more broadly recommended that central banks continue to hike interest rates to temper inflation, while governments implement “more targeted and temporary” support where needed.
While the Energy Price Guarantee will last beyond April 2023 in the UK, the government will scale back the level of support to target it toward the most vulnerable households.
UK chancellor Jeremy Hunt said that support for households was important to help people absorb rising prices, but it was important to get the economy “back on a more sustainable path” to “tackle inflation” and set the conditions for “long-term growth”.
For inflation, the OECD expects it to peak at the end of 2022 and remain above nine per cent going into early 2023. It is then forecast to ease to 4.5 per cent by the end of 2023, and then subside to 2.7 per cent by the end of 2024.
Interest rates are expected to continue to rise, hitting 4.5 per cent in April 2023.
The UK’s Energy Bills Support Scheme started to pay out to households in October, with £400 going to households to contribute to the cost of energy bills. The Energy Price Guarantee came into effect in the same month, capping annual energy bills at £2,500 for the typical household.
The UK Office for National Statistics [ONS] said in October that the approximate cost of both schemes stood at a combined £3.4 billion.
The ONS calculated that UK borrowing between April and October 2022 totalled around £84.4 billion, which was £21.7 billion less than the same period the previous year. The OBR said last week that it estimated that the public sector would borrow £177 billion this year.
Photo by Mathieu Stern on Unsplash
