OECD upgrades UK’s growth forecast

The UK economy has received the biggest annual growth upgrade in the G7 this year from a leading international forecaster in a boost to the government’s attempts to kickstart the economy.
In its latest outlook on the world economy, the Organisation for Economic Cooperation and Development said the UK economy was on course to expand by 1.1 per cent this year, an upgrade of 0.7 percentage points from its last forecast in May.
The revision is the largest for any economy in the G7 this year, with the OECD also expecting UK growth to come in 0.2 percentage points higher next year at 1.2 per cent.
The Paris-based organisation, which is made up of the world’s most advanced economies, said the UK was among a group of countries recording “robust” growth rates this year, with activity bouncing back strongly after a mild recession at the end of 2023.
The figures are a boon for Labour, who have made achieving the best long-run growth in the G7 one of the aims of the new government.
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Rachel Reeves, the chancellor, said: “Faster economic growth figures are welcome, but I know there is more to do and that is why economic growth is the number one mission of this government. Next month’s budget will be about fixing the foundations, so we can deliver on the promise of change and rebuild Britain.”
The OECD’s expected 1.1 per cent growth rate this year matches forecasts for France and Canada, both in the G7, but is far below the projected 2.6 per cent expansion forecast for the US in 2024. Japan is on course to be the worst-performing advanced economy this year, with a contraction of -0.1 per cent forecasted, while Germany is expected to record a modest 0.1 per cent growth rate, the OECD said.
The body also warned that higher growth rates would be coupled with accelerating underlying inflation in the UK, with its estimate for core inflation up by 0.4 percentage points to an average of 3.7 per cent this year and 0.3 percentage points higher in 2025, at 2.8 per cent.
The OECD highlighted that the price of more than half of the items measured in the UK’s consumer prices basket are still rising by more than 3 per cent on an annual measure.
“This points to some lingering underlying pressures,” the OECD said. “Services price inflation is still proving particularly sticky and has abated only slowly. If core goods price inflation remains unchanged at the current rate, year-on-year aggregate services price inflation may need to decline by … 2.5 percentage points in the United Kingdom … to bring aggregate core inflation back to a rate consistent with the inflation target.”
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The Bank of England has cut interest rates only once this year in August, falling behind the US and the eurozone, where the authorities have already cut borrowing costs by 50 basis points in the face of slowing inflation. Traders expect only one more quarter-point rate reduction in the UK before the end of the year, which would take the base rate to 4.75 per cent, and help propel the pound against major currencies.
Earlier this month, the OECD warned the new government that it needed to take “significant action” to stabilise the public finances in the face of “mounting spending pressures” from rising health, pension and climate change costs.
In the interim forecast, the OECD did not single out the UK but said that most advanced economies should attempt to “intensify” fiscal consolidation as “the monetary stance becomes less restrictive, provided growth does not slow substantially”.
It added: “Priorities differ across countries, but in many include the need to improve the targeting of benefits and subsidies, and further reforms to pension entitlement to take due account of rising longevity.
“On the revenue side, efforts to eliminate distortive tax expenditures and enhance revenues from indirect, environmental and property taxes are called for in many countries. These would expand the tax base and revenues, provide funds to help meet new spending needs and make the tax system more supportive of growth.”
Alvaro Pereira, the OECD’s chief economist, said it was “crucial” for the UK to increase investment and suggested the government change its current fiscal rule to allow for longer-term spending rather than “short-termism” to stabilise the public finances.
“The UK’s existing rules may tend to short-termism and the potential deterioration of the public finances in the long run,” Pereira told the FT.