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Central banks ‘risk tipping UK and other developed countries into recession’ | OECD

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Continued tough action by central banks to tackle stubborn inflation risks tipping Britain and other developed countries into recession next year, the west’s leading economic thinktank has warned.

The Organisation for Economic Co-operation and Development (OECD) said the chances of policymakers getting it wrong were “pretty high” and posed a threat to its central “soft landing” forecast for the global economy.

The Paris-based OECD – which has 38 rich country members – said its best estimate is that the UK would suffer a second year of sluggish growth in 2024, and foresaw little prospect of a pre-election surge in activity.

In its half-yearly economic outlook, the OECD said UK growth would remain “stable but low”, with national output rising by 0.5% in 2023 and by 0.7% in 2024. Six months ago, it was predicting expansion of 0.3% this year and 1% next.

Despite speculation that the recent fall in inflation would bring forward cuts in interest rates from the Bank of England to next spring, the OECD said it expected official borrowing costs to remain unchanged at 5.25% for the whole of 2024.

Meanwhile, the phasing out of energy subsidies and the impact of freezing tax allowances and thresholds would mean the Treasury sucking 2% of gross domestic product – about £50bn – out of the economy.

Clare Lombardelli, the thinktank’s chief economist, said a soft landing for advanced economies was far from guaranteed, adding: “The risks around it are pretty high.”

Lombardelli said the OECD had not calibrated the chances of a hard landing but added: “The risks of getting policy wrong are higher than they have been. It is unclear how much of the past tightening has fed through and how much is yet to come.”

Its report said Germany would be the worst-performing developed country this year, with Europe’s biggest economy contracting by 0.1% before recovering to post 0.6% growth in 2024. Overall, the 20-nation eurozone is expected to expand by 0.6% this year, against 2.4% in the US.

The OECD nations as a whole are forecast to grow by 1.7% in 2023 and by 1.4% in 2024. The world economy – boosted by growth in the non-members India and China – is predicted to expand by 2.9% in 2023 and 3% in 2024.

Lombardelli said: “In the United States, the economy is demonstrating more strength than expected, and there is a risk that inflation proves to be persistent. In the euro area, the full impact of tighter monetary policy is still to appear and activity may be hit more strongly than we expect.”

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The OECD expressed concern that the Israel-Hamas war could spill over into a wider regional conflict. “Heightened geopolitical tensions due to the conflict following the terrorist attacks on Israel by Hamas are a key near-term concern, particularly if the conflict were to broaden,” the economic outlook said.

“This could result in significant disruptions to energy markets and major trade routes, and additional risk repricing in financial markets, that would slow growth and add to inflation.”

Lombardelli said: “Inflation is easing but growth is slowing. The tightening of monetary policy needed to tackle inflation is taking effect. Despite stronger-than-expected GDP growth in 2023, tightening financial conditions weak trade and subdued confidence are taking a toll. Housing markets and bank-dependent economies, particularly in Europe, are feeling the impact.

“In summary, the global economy is grappling with inflation, slowing growth, and mounting fiscal pressures. Policymakers must prioritise macroeconomic stability, structural reforms, smart fiscal policies and international cooperation to foster sustainable and inclusive growth.”

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