According to the Organisation for Economic Cooperation and Development, the UK economy is set to suffer the slowest growth in the G7 next year. This is bad news for Rishi Sunak and Jeremy Hunt, who insist the government’s ‘economic plan is working’.
Slow Growth Predicted
The OECD has predicted 0.4% growth in 2024. That’s a bitter blow, given there was some (blunted) optimism that things would begin to really change this year.
Interest and Inflation Data Blamed for Slow Growth
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The OECD is basing its low growth forecast on high-interest rates from the Bank of England and the long-term effects of inflation on household finances.
The OECD Were Pessimistic… Now They Think It’s Even Worse
The 0.4% growth forecast has been revised down from the original 0.7% forecast by the think tank. The revision is due to skilled labour shortages and persistent price increases in the service sector of the economy.
Other G7 Economies Growth Predictions Increased
France, Germany and the US had their economic growth projections increased by the OECD for the year ahead. The German economic growth prediction was increased to 0.2%, but that still leaves it behind the UK predicted growth.
Germany Back on Its Knees
Previously, the German economy was the worst performer in the G7. Still, the predictions suggest it’s off its back and onto its knees now. It’s predicted to grow by 1.1% next year.
Economic Performance Determines Bank Moves
Depending on economic data, the Bank of England’s Monetary Policy Committee (MPC) votes on interest rate moves. Suppose the forecast is right and prices in the service sector continue to rise. In that case, the MPC might vote to maintain high-interest rates for longer.
Other Big Economies Taking Flight
According to the think tank, the USA and Canada are set to grow the fastest next year. Their protection from disrupted European supply chains, domestic oil supply and cheap energy will all help.
OECD Hopeful for Global Growth
The OECD report says, “There are some signs that the global outlook has started to brighten, even though growth remains modest”.
As Inflation Calms, Economies Grow
The report predicts that global growth will be 3.1% in 2024 and rise to 3.2% the year after. A slowing of inflation, coupled with rising incomes, is being cited as reasons for the extra growth.
Inflation Levelling off in 2025
There’s welcome news for many in 2025 when experts predict inflation will level off. This might be the trigger for many central banks to reduce interest rates, which will reduce borrowing costs. This will help across the entire economy.
Suggestion Inflation to Reduce by 2.5%
The report says, “By the end of 2025, inflation is projected to be back on target in most major economies”. The expectation is that global inflation will lower to 3.6%, having peaked at almost 6% in 2024.
What Does This Mean for the Public?
If the projections are accurate and there is some economic growth, it might give the government some fiscal headroom. If, as expected, we see a change in government, it gives them a chance to invest in public services or infrastructure projects.
Spending Cuts Already Baked In
Whitehall spending reductions will reduce the budget deficit from 4.6% to 3.5%, which will be accepted as a prudent use of the available funds. The overriding opinion in the economic community is that government spending should be reduced while things improve.
Jeremy Hunt Unsurprised by Prediction
The chancellor said: “This forecast is not particularly surprising given our priority for the last year has been to tackle inflation with higher interest rates.”
Hunt Remains Bullish on the Economy
He said, “The IMF predicted the UK will grow faster over the next six years than any European G7 country or Japan.” Whether or not this happens remains to be seen, of course.
Office for Budget Responsibility Disagree About UK Growth for 2025
Contrary to the OECD predictions for the UK economy in 2025, the OBR predicts the economy will grow by 1.9%. It cites the drop in inflation and likely reduction in interest rates as reasons for the accelerated growth.
Predictions Rarely Accurate
It’s worth mentioning that predictions are frequently wrong and should be used as a guideline only. While they may make some broad observations about economic direction, they are not likely to be spot on.
A Growing Economy Gives Government Room
One of the public concerns is the size of the national debt. If the economy grows, the national debt shrinks as a percentage of GDP. This is an easy win for a government that can claim it is reducing the national debt.
Growing Economy Is Good News for All
If the economies grow at a steady rate, inflation and interest rates will be reduced. This is good news for everyone, so let’s hope the OBR is right and not the OECD.
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