Britain will have the highest inflation of any major developed economy this year but should narrowly avoid recession, the Organisation for Economic Co-operation and Development (OECD) has said in its latest set of forecasts.
The Paris-based OECD – a club of rich countries – said that inflation in Britain will be higher in 2023 than nearly any of its other members save for Argentina and Turkey.
It warned that higher interest rates are likely to dampen economic growth and incomes in the coming months.
It comes after the chancellor told Sky News he would back the Bank of England to raise interest rates in the coming months to bring inflation under control, even if it pushed the UK into recession.
Like the International Monetary Fund late last month, the OECD has upgraded its forecast for UK economic growth this year and next, so it is no longer the slowest-growing nation in the group of seven leading industrialised economies.
The UK will grow by 0.3% this year and 1% in 2024, the OECD’s Economic Outlook predicted.
But the OECD said there were “significant risks” to its forecast.
“The high interest burden on public debt and the recent drop in average debt maturity leave the public finances exposed to movements in bond yields,” it said – a sign that it remains concerned about the state of the public finances.
“Renewed increases in wholesale energy prices due to Russia’s war of aggression against Ukraine would further squeeze real incomes given the United Kingdom’s high dependence on natural gas. Faster-than-expected resolution of uncertainty regarding future trade relationships is an upside risk.”
The OECD said the UK’s inflation rate should average 6.9% this year, higher than the OECD average and indeed nearly every other country in the developed world.
It added that there were worrying signs about the rate of inflation in the UK, compared with other countries.
The share of items in the consumer price index “basket” rising by more than 5% a year is now up to more than a third in the UK, compared with under 30% in the euro area, Japan, Canada and the US.
The OECD’s new chief economist Clare Lombardelli, who recently joined from the UK Treasury, said that global growth would be a little bit stronger this year than expected, but at 2.7%, it remained below what might be considered a healthy rate.
“The global economy is turning a corner but faces a long road ahead to attain strong and sustainable growth,” she said.
“Monetary policymakers need to navigate a difficult road. Although headline inflation is declining thanks to lower energy prices, core inflation remains stubbornly high, more so than previously expected… Some economies grappling with stubbornly high core inflation may require additional interest rate increases.”
Responding to the OECD announcement, Chancellor Jeremy Hunt said:
“Today’s report boosts our growth forecast, praises our action to help parents back to work with a major expansion of free childcare, and recognises our cuts to business taxes which aim to drive investment.
“But while inflation is still too high, we must stick relentlessly to our plan to halve it this year. That is the only long term way to grow the economy and ease the cost of living pressures on families.”