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OECD unveils gloomy outlook for the UK economy

The forecasts are even worse than those unveiled in the budget - AFP
The forecasts are even worse than those unveiled in the budget - AFP

The UK economy will weaken as the jobs boom ends and inflation hits household incomes, according to a major global think tank.

This is another blow for the UK, after sharp cuts to GDP forecasts were unveiled in the Budget last week.

Revealing its outlook for 2019 for the first time, the Organisation for Economic Co-operation and Development (OECD) said it expected UK growth to worsen over the next two years. Its view is even more bleak than that of the Office for Budget Responsibility, presented last week.

The OECD predicts that the UK economy will grow by 1.1pc in 2019, compared to 1.3pc in the OBR’s view.

Brexit was not the primary cause for this negative outlook. Indeed the forecast assumed that a transition period would be secured between the UK and EU after 2019.

Instead productivity, inflation due to the cheaper pound, and ballooning consumer debt were cited as the major causes for a slowdown in consumption.

The OECD's growth forecast is one of the more pessimistic
The OECD's growth forecast is one of the more pessimistic

The think tank said: “Private consumption is projected to remain subdued as higher inflation, pushed up by the past depreciation of sterling, holds back household purchasing power.”

It said that in order to offset the impact of poor real wage growth consumers would spend their savings, and this would prop up consumption levels for a time. But political uncertainty around leaving the EU could dampen spending, even more than its forecasts already suggest.

The UK Government was told to tackle productivity and mitigate the impact of Brexit by raising investment in “productivity enhancing measures”.

The forecast for 2018 has been upgraded, however. Increased export activity in the UK has led the OECD to raise its forecast by two basis points from 1.0pc to 1.2pc growth. This remains 0.2pc percentage points lower than the OBR’s view.

This, added to slower than expected cuts to public spending, has improved the picture for the economy.

“The upward revision of 0.2 percentage points for 2018 in part reflects the slower pace of fiscal consolidation announced in the Budget, and also partly reflects our revised technical assumption on the exit from the EU,” the OECD said.

Morgan Stanley - Credit: Mario Tama
US bank Morgan Stanley has a forecast for UK GDP in 2019 below that of both the OECD and the OBR Credit: Mario Tama

The OECD is not alone in its forecast. Swiss bank UBS shares its prediction of 1.1pc growth in 2019, but this is still a fairly negative view compared to others. The consensus view of economists is that the economy will grow by 1.4pc next year. The Bank of England thinks GDP will expand by 1.6pc in 2018, and 1.7pc in 2019, according to its November Inflation Report.

US bank Morgan Stanley takes a more negative outlook, even than the OECD. Its forecast for 2018 is for 1.1pc growth followed by a very weak picture of 0.8pc growth in GDP in 2019. 

At 0.8pc, that would see the entire UK economy grow less in a year than Germany has in the last quarter.

"Forecasting for the UK economy in 2019 really is complete guesswork," said Samuel Tombs of Pantheon Economics. 

Mr Tombs said while there was clearly huge uncertainty, such as the nature of a likely Brexit deal, and transition arrangement, but if the outlook seemed positive, then firms would stop holding off on investment plans.

"[Firms no longer holding onto cash] could really boost the UK. The picture will become clearer over the next six months," he said. 

Paul Hollingsworth of Capital Economics told The Telegraph that the findings were "a bit too pessimistic." He added that inflation was likely to fall back next year, easing the real pay squeeze.

"Despite concerns over the negative effects of Brexit uncertainty, for now at least, surveys of firms’ investment intentions are holding up pretty well," he said.

The OECD forecasts slow UK growth relative to other nations
The OECD forecasts slow UK growth relative to other nations

The OECD's global outlook was one of fast-paced growth, with 3.7pc expansion expected in 2018, but this upturn "was modest compared with the standards of past recoveries."

The US is set to grow by 2.5pc in 2018, and 2.1pc in 2019, with the Euro area slightly weaker at 2.1pc and then 1.9pc GDP growth in the next two years.

The UK was not the only economy set for a slowdown in 2019, according to the think tank. It expects to see growth "easing slightly" worldwide, it said. 

The long term impact of the financial crisis is still present in sluggish investment, trade, productivity and wage growth.

"Some improvement is projected in 2018 and 2019, with firms making new investments to upgrade their capital stock, but this will not suffice to fully offset past shortfalls, and thus productivity gains will remain limited," the OECD said.

Rising protectionism among major economies could also present a risk to the UK,  an OECD spokesman told The Telegraph:

"The UK is indeed vulnerable to global protectionism given its economic openness and the need to reach new trade arrangements following Brexit. Increased protectionism would not only impact trade flows, but might also impact investment flows between countries."