The OECD say the UK will have the biggest contraction of any of the world's richest seven countries and the smallest expansion the year after that, as Joel Hills explains
Have you ever been on a moving train as another train, on a parallel track but headed in the same direction, edges ahead of you?
The latest assessment of our economic prospects by the Organisation for Economic Cooperation and Development (OECD) suggests the UK is in the process of being gradually but steadily overtaken.
First the facts: the UK and Japan were the only major G7 economies to contract in the three months to September and the UK is the only G7 economy to not yet have recovered to its pre-pandemic size.
Now the forecast: the OECD thinks the outlook for the UK isn’t great either.
The OCED believes our economy will contract by 0.4% next year (the biggest fall in GDP in the G7) and will grow by just 0.2% in 2024 (the weakest growth in the G7).
Like the Bank of England and the Office for Budget Responsibility (OBR), the OECD thinks the UK has entered a recession but one it predicts will prove shorter (one year) and shallower (a peak-to-trough fall in GDP of only 0.7%) than those the Bank and the OBR envisage.
The OECD calculates that the increase in the minimum wage, the uprating of both benefits and pensions in line with inflation, announced by the chancellor last week, will take the edge off the downturn but it is critical of the government’s Energy Price Guarantee.
The “untargeted” subsidy is expensive, and will “increase pressure on already high inflation in the short-term, requiring monetary policy to tighten more”.
The OECD expects the Bank of England to raise interest rates from 3% currently to 4.5% next year.
These are educated guesstimates, of course, but if they or something like them do come to pass then the government will have its work cut out explaining why the UK economy appears to be underperforming, relative to other the counties that we like to compare ourselves to.
The chancellor was quick to point out in his Autumn Statement last week that rising prices, the rising cost of borrowing and lower growth are global issues.
As Jeremy Hunt put it, inflation is “higher in Germany, the Netherlands and Italy”, interest rates have risen faster “in the US, Canada and New Zealand” and growth forecasts “fallen further in Germany”.
Quite so. But in the round, the data creates a pretty strong impression that the UK is having a particularly hard time of things.
The UK is sensitive to the global spike in energy price because we are so highly dependant on oil and gas to meet our energy needs - an unfortunate consequence of our highly successful transition away from coal in the necessary journey to Net Zero.
"Everybody is being hurt by the energy crisis, no doubt about it," Alvaro Pereira, the Chief Economist of the OECD, told ITV News.
"We are definitely paying a very hefty price for Russia's aggression on Ukraine."
"Russia itself, in economic terms, is having the biggest recession of any G20 country for the last 20,30 years, with a contraction over two years of more than 10 percent."
Alvaro Pereira said the war in Ukraine is having an economic ripple effect around the world
The Bank of England has also raised interest rates more aggressively that the European Central Bank, crushing the spending power of many UK borrowers.
There are differences in the ways countries calculate GDP, but the OECD's analysis flags up other fundamental issues.
The UK is almost unique in that the size of its workforce is smaller today than it was pre-COVID.
Business investment in the UK has also been weak for a number of years. In the OECD’s view, it was damaged first by the uncertainty that Brexit created and more recently by the extraordinary collapse of two governments in the space of four months.
The OECD also believes that Brexit “is likely” to have damaged trade with the EU when in took effect in the midst of the pandemic in January 2021.
“We already know that Brexit has significantly reduced the volume of UK-EU trade,” says Ian Mulheirn, chief economist at the Tony Blair Institute for Global Change.
“And that’s a key mechanism by which economists expected the UK to be made poorer by Brexit. As a result, even without the inflation shock, we’d expect UK growth to be lagging behind most of our peers for a few years yet.”
Laggard status and low growth are serious problems. The war in Ukraine and the pandemic are the main drivers of the crisis we now face but Brexit is in the background and the UK needs the persistent damage it appears to have caused like it needs a hole in the head.
Governments that can’t raise living standards tend to run into problems.
Passengers on slow-moving trains don’t like the feeling of falling behind.
Want a quick and expert briefing on the biggest news stories? Listen to our latest podcasts to find out What You Need To Know...