UK to avoid recession but will have highest inflation rate in G20, OECD says

UK chancellor of the Exchequer Jeremy Hunt
The OECD said that chancellor Jeremy Hunt’s tax raid will put pressure on UK households over the coming years as people continue to battle an ongoing cost of living crisis. Photo: Frank Augstein/AP

The UK is set to avoid a recession this year, but is expected to grow just 0.3%, the Organisation for Economic Co-operation and Development (OECD) has revealed.

The new figure comes as an upgrade from a 0.2% downturn it had previously predicted, while GDP is anticipated to rise 1% next year, rather than the 0.9% in the previous forecasts thanks to an improvement in real income growth.

“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.

"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."

Despite faring better than Germany, the Paris-based organisation said that chancellor Jeremy Hunt’s tax raid will put pressure on British households over the coming years as people continue to battle an ongoing cost of living crisis.

It said the decision to freeze income tax thresholds until 2028 will “significantly increase fiscal pressure on households, pushing 1.7 million people to start paying income taxes and 1.2 million people to pay higher rates”.

Read more: UK house prices fall for first time since 2012

It follows a similar announcement from the International Monetary Fund (IMF), which also upgraded its predictions for Britain. However, it comes amid a warning that the UK is set to have one of the highest inflation rates in the G20.

The report said inflation was set to be stickier than hoped, with the best performer among the G7 is set to be the US, growing by 1.6% this year before easing to 1% in 2024.

"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,” chancellor Jeremy Hunt said.

“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."

The OECD also predicted that unemployment was set to rise, reaching 4.5% next year. It said women's skills were not being fully utilised in the labour market as they disproportionately work part-time due to caring duties.

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It also raised its growth outlook for the world economy as China relaxes is COVID-19 restrictions, and as inflation eases, however, it did warn that there was a “long road” to recovery.

It forecast an economic expansion of 2.7%, up from 2.6% previously, with upgrades for the US, China, and the eurozone.

However, this was still below the 3.3% growth recorded last year and would be the lowest annual rate since the 2008-2009 global financial crisis, with the exception of 2020 when the pandemic hit.

“The global economy is turning a corner but faces a long road ahead to attain strong and sustainable growth,” Clare Lombardelli, recently-appointed OECD chief economist, said. “The recovery will be weak by past standards.”

The OECD forecast that inflation in the G20 would fall from 7.8% to 6.1% this year, and 4.7% in 2024.

Watch: What is a recession and how do we spot one?

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