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UK Faces Worst Downturn Of Any Advanced Economy, OECD Says

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The UK economy will suffer a bigger blow from the global energy crisis than other leading nations, according to a report from international body the Organisation for Economic Cooperation and Development (OECD).

The UK will contract more than any other nation in the G7 group, it said.

Growth in the US and the eurozone will be weak, but Germany is the only other major economy expected to shrink.

The OECD forecasts a “significant growth slowdown” globally in 2023.

Thanks to the strength of emerging economies, the world economy will grow by 2.2% next year, the OECD’s latest report predicts.

But the war in Ukraine was affecting economies unevenly, the OECD said, with European countries bearing the brunt of the impact on business, trade and the spike in energy prices.

The G7 includes the US, UK, Canada, France, Germany, Italy and Japan. While growth is expected to be weaker in most countries in the group, only Germany and the UK will contract, the OECD predicts.

The UK’s economy is forecast to shrink by 0.4% in 2023 to be followed by shallow growth of just 0.2% in 2024.

By contrast, last week the UK’s Office for Budget Responsibility (OBR) predicted the UK would shrink by 1.4% next year, although it also predicted stronger growth, of 1.3% in 2024.

Germany’s gross domestic product (GDP) is expected to fall by 0.3%, the report says.

The OECD, an intergovernmental body that focuses on economic policy, lays some of the blame for the UK’s poor performance on the Energy Price Guarantee, the scheme to support household and business energy bills.

While subsidising energy bills reduces the immediate headline inflation rate, the OECD warns that it will add to overall demand in the economy, increasing inflationary pressures in the medium-term. That in turn would require the Bank of England to raise interest rates further and add to the cost of servicing debts.

“Better targeting of measures to cushion the impact of high energy prices would lower the budgetary cost, better-preserve incentives to save energy, and reduce the pressure on demand at a time of high inflation,” it said.

The OECD said central banks should maintain their focus on fighting inflation through higher interest rates and that subsidies would need to be “more targeted and temporary”.

It added that UK inflation was likely to peak at the end of this year but remain above 9% in early 2023, slowing to 4.5% by the end of next year.

The OECD expects interest rates to rise from their current 3% to 4.5% next April and unemployment to rise to 5% by the end of 2024.

Energy support

UK government borrowing rose in October from a year ago as the UK started paying for the energy support scheme.

Borrowing – the difference between government spending and tax income – was £13.5bn last month, the Office for National Statistics (ONS) said on Tuesday.

Although the figure was £4.4bn higher than last year it was lower than analysts had expected.

Chancellor Jeremy Hunt said people needed support through the aftershocks of Russia’s invasion of Ukraine.

However, he said the public finances needed to be put “back on a more sustainable path” so Britain could “tackle inflation and ensure the economic stability needed for long-term growth”.

October saw the first payment to households under the Energy Bills Support Scheme, under which the government is giving all households £400 towards the cost of their energy bills.

In addition, last month also saw the start of the Energy Price Guarantee scheme, which caps the annual energy bill of a typical household to £2,500 and also provides support for businesses.

The ONS estimated that these schemes together cost £3.4bn in October.

Michal Stelmach, senior economist at KPMG, said the public finances were facing a “tug-of-war” between demand for energy support and the overarching need to balance the books”.

The ONS said that borrowing in the financial year to date – covering April to October 2022 – was £84.4bn, although this was £21.7bn less than in the same period last year.

Last week, the government’s independent forecaster, the Office for Budget Responsibility (OBR), predicted that the public sector would borrow £177bn this year, which would be the second highest figure since 1994.