Rishi Sunak has suffered a major blow as a major international forecast showed that Britain is set to suffer the highest inflation and the second-slowest growth rate in the G7.
The Organisation of Economic Co-Operation and Development (OECD) has slashed its economic growth forecast for the UK while increasing its expected inflation rate.
The forecaster said the UK economy will grow by just 0.5 per cent this year – making it the worst-performing of all advanced economies in the G7 group bar Germany.
Growth will average just 0.7 per cent next year – downgraded from an earlier forecast of 0.8 per cent – followed by an expected economic uptick to 1.2 per cent in 2025.
Inflation – the rate at which prices are rising – is set to average 7.3 per cent across this year, compared with an earlier forecast of 7.2 per cent. It is then expected to fall to 2.9 per cent next year, and 2.5 per cent the year after.
The figures represent a big setback to Mr Sunak and his chancellor Jeremy Hunt just a week after they claimed the economy had “turned a corner”.
After cutting personal taxes in a pre-general election giveaway, the PM had claimed that there is “positive momentum” behind Britain’s recovery.
But the latest figures show British families will still be grappling with spiralling prices in the year ahead, while Britain’s economy is outgrown by G7 countries like France, Italy, the US, Canada and Japan.
In its report, the OECD said growth in the major European economies “is expected to remain weak in the near term but improve gradually as inflation wanes, monetary policy easing gets underway and real incomes recover”.
The organisation said GDP growth in the UK is “projected to be subdued, with higher fiscal pressure weighing on household disposable incomes, but to improve from 0.5 per cent in 2023 to 0.7 per cent in 2024 and 1.2 per cent in 2025”.
Rachel Reeves, Labour’s shadow chancellor, said the OECD figures “blow a hole in Rishi Sunak’s claims that he has fixed the economy”.
She said Britain was “worse off after thirteen years of economic failure under the Conservatives, with low growth, high tax and prices still rising in the shops” – promising Labour would be “the party of economic growth”.
The forecast comes after the governor of the Bank of England Andrew Bailey said the UK’s growth outlook is the worst he has ever seen.
Mr Bailey offered a scathing assessment of immidiate future, saying interest rates will remain at 15-year highs for the foreseeable future. “It does concern me that the supply side of the economy has slowed. It does concern me a lot,” he said earlier this week.
The governor added: “If you look at what I call the potential growth rates of the economy, there’s no doubt it’s lower than it has been in much of my working life.”
The Bank of England kept interest rates at 5.25 per cent earlier this month and has insisted that it is too early to think about cutting rates.
There were some encouraging figures on the housing market from the Bank of England on Wednesday, however. The number of mortgages approved picked up last month after interest rates were held steady.
Bank of England figures showed that 47,400 mortgages were approved for house purchases in October, up from the eight-month low of 43,300 recorded in September.
Jason Tebb, chief executive of property platform OnTheMarket.com, said: “Borrowers are daring to believe that base rate may have peaked, giving them a better idea of where they stand and what they can commit to when it comes to a property purchase.”
The OECD warned that the concerted push by central banks to tackle persistent inflation risks tipping Britain and other major economies into recession next year. The body said the chances of getting the balance on interest rates wrong was “pretty high”.
Higher borrowing costs are still weighing on the housing market and business investment, the OECD said. Meanwhile, the growing tax burden is squeezing household incomes.
Heightened geopolitical tensions are also adding to uncertainty about the outlook in the near term, with the Israel-Hamas conflict raising concerns over disruption to energy markets, according to the organisation.
A Treasury spokesman said: “While many predicted recession, the OECD – like the Bank of England and the International Monetary Fund – has upgraded the UK’s growth this year.
They added: “While inflation is falling, now we are taking the long-term decisions needed for growth. As the chancellor set out at the autumn statement last week, we are making sure work always pays and backing businesses to invest.”