The UK lags the OECD average as pandemic GDP recovers

LONDON – The UK’s growth has lagged the world’s largest economies since the Covid-19 pandemic and is substantially below the OECD average, according to a new report by the influential Paris-based group.

UK gross domestic product contracted by 0.4% between Q4 2019 and Q3 2022, compared with cumulative growth of 3.7% in the 38-member Organization for Economic Co-operation and Development .

In the G-7 nations, which includes Canada, France, Germany, Italy, Japan, the United States and the United Kingdom, GDP grew cumulatively by 2.5%, with only the United Kingdom reporting a decline.

“We think this is happening mainly because of investment and consumption,” Alvaro Pereira, chief economist at the OECD, told CNBC’s Joumanna Bercetche on Tuesday.

“Knowing that the UK faces a difficult fiscal situation, that’s why we welcome what the government has done in the latest statement,” he said.

Last week, Finance Minister Jeremy Hunt announced around £30bn in spending cuts and £25bn in tax increases for workers and businesses in what he called a bid to rebuild public finances, limit the 41-year high inflation and restoring economic credibility after September’s budget crash.

“We think it is very important to maintain fiscal prudence while being able to push or try to introduce certain types of reforms to address some of the problems that have plagued the UK for a long time, namely very low productivity,” Pereira continued.

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“I think it’s time to focus on that, as well as monetary and fiscal policy.”

Pereira added that the OECD’s forecast for the extent to which the UK economy would grow between 2022 and 2024 was similar to that of the independent Office for Budget Responsibility, but projected a shallower recession of 0.4% a year. next year, but 0.2% growth the following year, while the UK OBR expects a deeper recession and a stronger rebound.

Former Bank of England politician Michael Saunders told CNBC this week that Hunt’s plan had a “huge” hole where an economic growth strategy should be.

“Light at the End of the Tunnel”

The OECD’s Global Economic Outlook report was also released on Tuesday.

This warned that the global economy is set to slow in the coming year due to the energy market shock caused by the Russian invasion of Ukraine and amid skyrocketing inflation, low consumer confidence and global risks.

However, he believes the world will avoid a recession, with growth of 3.1% in 2022, 2.2% in 2023 and 2.7% in 2024.

OECD Secretary-General Mathias Cormann said in his televised remarks that “the world is facing significant headwinds and substantial risks on the horizon” and “countries also need to take bold steps to address some of the long-term challenges facing lay the foundations for a stronger country and a more resilient economy”.

This included structural reforms such as increasing child support and flexible work options to encourage more women in the workplace, create incentives to increase investment in low-carbon technology, and keep international borders open to trade for alleviate supply-side inflationary pressures.

Pereira told CNBC: ‘We are facing a very difficult environment. I think one of the most dramatic pictures we have in our perspective is exactly how much countries are spending on energy as a percentage of GDP, and you can see it right now. for OECD countries it is close to 18% … which is the highest we saw in the oil crisis of the 70s and 80s”.

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“We are facing a very large energy shock right now that is lowering growth, while fueling inflation.”

The main downside risks have been within energy markets, particularly next year in Europe and Asia if there are two cold winters and retail prices track higher wholesale prices, he said. The OECD is also concerned about financial market volatility for low-income countries and emerging markets that have high debt burdens due to rising rates.

However, he reiterated that the OECD has not forecast an annual recession, even in major economies such as the US and the eurozone.

He also said that central bank action on monetary policy will start to take effect to tame inflation and that the latest press on US inflation has been “pretty positive”.

“We expect that not only in the United States, but also in other parts of the world, the toughness of monetary policy will start to have an ever greater impact. Our central forecast sees inflation in many countries peak in the middle of next year or towards the end of this year, but especially next year,” said Pereira.

“Particularly in 2024 we will start to have inflation rates much closer to target, so there is some light at the end of the tunnel, but we must not let monetary and fiscal tightening work hand in hand.”

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