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Gloom and gloomier

 

If the Chancellor’s Budget predictions for UK growth were not gloomy enough, the OECD made some even gloomier ones this week.

  • The OECD’s forecasts for the UK are even more pessimistic than those of the OBR
  • Brexit is happening against a backdrop of global economic strength
  • The OECD forecasts weakness from 2019, just at the point of maximum UK vulnerability

The global policy forum blamed the continuing uncertainty around Brexit negotiations and the impact of inflation on household purchasing power for its downgrade of UK growth, and said that if there was no agreement on a transition period, it could be a whole load worse.

The OECD said economic growth would be 1.5% this year, 1.2% in 2018 and 1.1% in 2019. This is lower than the Chancellor’s prediction of 1.5% this year, 1.4% next year and then slip to 1.3% by 2019, and a very long way below the OBR’s previous estimates of 2% for this year and 1.6% for next year.

It is clear that this is a self-inflicted wound and comes as the rest of the world is strengthening. The OECD projects that the global economy will grow by 3.6% this year, 3.7% in 2018 and 3.6% in 2019. This is a slight improvement on the last set of predictions made in September.

It is notable that Brexit is happening at a time of significant strength for the Eurozone, which is currently enjoying among the highest growth in the developed world.  The OECD predicts the euro area will grow at 2.4% in 2017. This compares to 2.2% for the US, and 1.5% for Japan.

It also suggests that while the economic difficulties have not come as swiftly or as severely as the worst of ‘Project Fear’ remainers might have thought, the backdrop has been benign. The UK has been supported by the relative strength of the global economy and, as such, if that starts to turn down, more difficult times could follow. This is likely to come at the most sensitive point for the UK – in 2019. Investors will have to hope that policymakers have made some progress by then.

The OECD was under no illusions that weaknesses remain in the global economy. It said: “Longer-term challenges inhibit stronger, more inclusive, and more resilient economies.” It said employment rates are now above pre-crisis rates in many OECD economies and unemployment is falling, but this has yet to produce solid real wage gains.

It is urging focused structural and fiscal action on boosting long-term potential as monetary policy support is reduced. It said countries should implement reform packages that incentivise the private sector to promote productivity, higher wages and more inclusive growth. Did the Chancellor do this in his latest budget? The jury is out.

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