The UK will be the second weakest performer of the world’s big economies next year as the global economy continues to suffer the knock-on effects of the biggest energy shock in four decades, a leading international institution has warned.
The Paris-based Organisation for Economic Co-operation and Development said only Russia of the members of the G20 group of leading developed and developing nations would suffer a bigger contraction than Britain in 2023.
In its half-yearly economic outlook, the OECD said the UK economy would expand by 4.4% this year – the sixth fastest rate in the G20 – but contract by 0.4% next year.
Although most countries have had their growth forecasts cut by the OECD since June, only Russia’s 5.6% contraction is forecast to be more severe than Britain’s. The poor performance is forecast to continue in 2024 with expansion of 0.2% – the joint weakest alongside Russia.
The OECD’s acting chief economist, Álvaro Pereira, said he was expecting a less severe downturn next year than the 1.4% decline pencilled in by the Office for Budget Responsibility in last week’s autumn statement, but a more subdued recovery in 2024 than the OBR had pencilled in.
Pereira said the OECD thought interest rates would peak at a lower level than the OBR was anticipating, and that the UK would suffer a four-quarter recession ending in the middle of 2023.
Pat McFadden, Labour’s shadow chief secretary, said the OECD’s forecasts were “yet more evidence of the Tories’ 12 years of economic failure”.
Noting that the UK would be alone among the OECD’s 38 members in having a smaller economy in 2024 than in 2019, McFadden added: “This is the Tory doom loop. A low growth spiral leading to higher taxes, lower investment, squeezed wages and poor public services.”
Overall, the OECD expects growth across its 38 rich-country members to be 0.8% in 2023 – half the level expected six months ago. The US and the eurozone are forecast to expand by 0.5%, but growth is expected to be stronger in three big Asian economies – China (4.6%), Indonesia (4.7%) and India (5.7%).
Of the three biggest EU economies, Germany is forecast to be the third worst-performing G20 country (-0.3%), while Italy (0.2%) and France (0.6%) are likely to post modest growth, according to the OECD.
Pereira said: “The global economy is reeling from the largest energy crisis since the 1970s. The energy shock has pushed up inflation to levels not experienced for many decades and is lowering economic growth all around the world.
“Higher inflation and lower growth are the hefty price that the global economy is paying for Russia’s war of aggression against Ukraine. Although prices were already creeping up due to the rapid rebound from the pandemic and related supply chain constraints, inflation soared and became much more pervasive around the world following Russia’s invasion.”
Pereira said the upshot of the unexpected surge in prices was that real wages were falling in many countries, slashing purchasing power and hurting people everywhere.
The OECD economist said the UK’s poor performance was because of a combination of rising interest rates, government action to bring down borrowing and debt, and the market turbulence during Liz Truss’s brief period as prime minister.
The economic outlook said the untargeted energy price guarantee announced in September 2022 had increased pressure on already high inflation in the short term, requiring higher interest rates and raising debt service costs.
It also stressed the risks of blackouts in the coming months: “Although Britain is not reliant on Russian exports, it imports gas and electricity from the continent during the coldest months. A particularly cold winter could risk supply disruptions, exposing the economy to rolling power cuts.”
