BRITAIN’S ECONOMIC recovery will be sluggish and significantly slower than previous upswings, a leading international organisation has concluded, as growth is hit by austerity measures and lacklustre export performance.
The Organisation for Economic Co-operation and Development’s two-yearly survey of the UK economy forecasts slow growth in 2011 and 2012, followed by a weaker medium-term outlook than expected by either the Office for Budget Responsibility or the Bank of England.
The Paris-based body nevertheless still supports the austerity plans, saying there is no realistic alternative. Angel Gurría, OECD secretary general, launched the report yesterday in front of George Osborne at the treasury with the message: “UK – stay the course.”
In a double-act that at times sounded like a mutual appreciation society, Mr Osborne endorsed Mr Gurría’s calls for Britain to free up its planning system, increase educational opportunity for poor children and improve vocational training.
Mr Osborne said: “This government has set the right course for the British economy but we have so much more to do. We will stick to the course we have set out. The mission of this year’s budget is to move from rescue to reform.”
Mr Gurría dismissed Labour’s calls for Mr Osborne to go slower with his deficit reduction plan, arguing that Gordon Brown’s government had left the country with too much borrowing before the financial crisis struck.
“When you have a double-digit deficit, you have to move very fast, very decisively and let everyone know – leave them with no doubt whatsoever – what is your intention,” he said.
But behind the back-slapping, the OECD’s report strikes a cautious note. It says “fiscal consolidation will impact significantly on government consumption and investment, but is also reducing household income growth . . . [which] will continue to hamper household consumption”.
In response to the weak outlook, with growth of 1.5 per cent in 2011 and 2 per cent in 2012 forecast, compared with the OBR’s equivalent forecasts of 2.1 per cent and 2.6 per cent, respectively, the OECD recommends interest rates remain lower for longer than investors currently think is likely.
“Monetary policy should hence remain expansionary, even if headline inflation is significantly above target, to support the recovery,” the OECD concluded, suggesting that the first rate rise should not be considered until the second half of this year at the earliest.
Of particular concern to the OECD, given the depreciation of sterling in 2007 and 2008, has been the “lacklustre export performance”, with services exports performing particularly poorly and manufacturers preferring to raise profit margins rather than expand volumes in the short term.
Despite sterling’s fall, “improvements in competitiveness have been modest”, the OECD said.
While the organisation strongly supported the government’s drive to reduce the budget deficit, it criticised Mr Osborne for not seeking to make austerity more supportive of growth.
The report came as new figures showed unemployment in the UK rose by 27,000 to 2.53 million in the three months to January, the highest level for 17 years, while joblessness among young people also hit a new high.
The increase took the jobless rate to 8 per cent of the workforce up from 7.9 per cent in the previous quarter.
Economists had expected the rate to remain stable.
However, the number of people claiming jobseeker’s allowance fell in February and there was a rise in overall employment. – Copyright The Financial Times Limited 2011
