The UK economy will contract more than any of the world’s seven most advanced nations next year as Britain suffers from painful inflation exacerbated by worker shortages and “untargeted” energy support, according to a report.
he latest forecasts from the Organisation for Economic Co-operation and Development (OECD) reveal a sharp downgrade for the UK economy, which is expected to shrink by 0.4% in 2023 and grow by just 0.2% in 2024.
It had predicted in September that UK growth would flatline in 2023.
The OECD forecast came after Prime Minister Rishi Sunak Rishi Sunak insisted the UK will not realign with EU laws under his watch as the Government seeks to sink speculation it is weighing up a Swiss-style relationship with Brussels.
The Prime Minister said he voted for and continues to believe in Brexit, pointing to opportunities to control migration and strike new trade deals.
It follows a report that his Government is considering putting the UK on the road to closer ties with the European Union, which alarmed Brexiteers.
Both Downing Street and senior ministers have sought to play down the suggestion.
But business leaders in Northern Ireland have said closer ties with the EU would benefit the UK as a whole, as well as Northern Ireland.
Mark O’Connell, the founder of investment advisors OCO Global, said that “at the heart of Britain’s economic woes was its reckless and misguided decision to leave the EU, against the advice of industry, investors, the Bank of England, CBI, and almost every thinktank and economic pundit in the country”.
He said that while some problems were shared with EU members, the bloc was in a better position to take action. “High inflation is a feature of many of our neighbours in Europe driven by energy costs, but the difference from the UK is that that can make interventions to contain the supply side and incentivise and accelerate the switch to alternatives given the scale of the bloc and their purchasing power.”
Stephen Kelly, chief executive, Manufacturing NI
Stephen Kelly, chief executive of Manufacturing NI, described the post-Brexit agreement negotiated between the UK and EU as “skinny” and that closer dies would benefit business. “It’s clear that GB traders, manufacturers and others are struggling with the skinny deal the UK secured with the EU and need it to be more far reaching.
“It’s needed to help exporters, those with complex supply chains and improving the relationship would help the U.K. economy, retailers and in turn all households in the midst of a cost of living and cost of business crisis.
“More locally, the agrifood community in Northern Ireland, from the supply chain to producers to retailers, have long called for a veterinary and SPS deal to remove risks for supply chains across the Irish Sea. An improved relationship between the UK and EU would help right across the local economy.
“At this point, it looks like in the next General Election that a Labour-led government is possible, perhaps even likely.
“Their stated policy position is a closer, even aligned in some areas, relationship with the EU in the interests of both business and consumers. It makes sense for so many but looks like we’ll have to wait until the country decides who it wants to form the next government before we get there.”
Germany is the only other country in the G7 group of countries set to see a contraction in gross domestic product (GDP) next year, with a 0.3% drop, according to the report.
Italy will see only paltry growth of 0.2%, while the United States will eke out 0.5% expansion, with GDP set to rise by 0.6% in France and 1% in Canada and 1.8% in Japan.
The UK’s hit from the cost crisis next year is also worse than the average of all the world economies, with the OECD predicting global growth of 2.2% next year, as well as the G20, with 2.2% also pencilled in.
The group also took aim at the Government’s support efforts to cap energy bills at around £2,500 until April, saying it will push up inflation and mean households and businesses will be hit by higher interest rates as a result as policymakers look to rein in price and wage rises.
It said: “The untargeted Energy Price Guarantee announced in September 2022 by the Government will increase pressure on already high inflation in the short term, requiring monetary policy to tighten more and raising debt service costs.
“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.”
The gloomy picture for the UK comes after the official forecaster, the Office for Budget Responsibility (OBR), last week warned Britain’s economy will shrink by 2% in total over a lengthy recession that started in the third quarter.
It downgraded previous projections that the economy would actually grow by 1.8% in 2023 to a fall of 1.4% for the year.
The OECD said UK inflation – which hit a 41-year high of 11.1% in October – will likely peak at the end of this year and remain above 9% into early 2023, before slowing to 4.5% by next year-end and to 2.7% by the end of 2024.
Its report sees UK interest rates rising further from 3% currently to 4.5% by April next year, while unemployment will lift from 3.6% to 5% by the end of 2024.
On Britain’s outlook, the OECD cautioned: “Risks to the outlook are considerable and tilted towards the downside.
“Higher-than-expected goods and energy prices could weigh on consumption and further depress growth.
“A prolonged period of acute labour shortages could force firms into a more permanent reduction in their operating capacity or push up wage inflation further.”
But it said households may choose to return to the jobs market to help boost stretched finances.
“While households may seek to boost their real income by striking for stronger wage increases, they may also increase their labour supply either by returning from inactivity or by increasing working hours, which would be an upside risk,” said the OECD.
While the UK is facing a prolonged recession, the OECD believes the world economy will avoid the same fate.
