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The UK economy will be the worst performer in the G20 bar Russia over the next two years, the OECD said on Tuesday, underscoring the lasting impact of high energy prices on Europe as a whole.
The OECD said in its latest economic forecast that UK gross domestic product will fall by 0.4 per cent in 2023 and grow by just 0.2 per cent in 2024. It would be a longer and deeper recession than expected for Germany, which has a manufacturing-intensive economy. Particularly vulnerable to high energy prices.
In an apparent reference to Brexit, Alvaro Santos Pereira, the OECD’s acting chief economist, said ongoing economic adjustments in the UK had exacerbated long-standing concerns about the country’s low productivity growth.
He cited Britain’s need to build post-Brexit trade relations with the rest of the world, saying “trade deals you need to export and so on are on the agenda”.
The UK is already the only country in the G7 where output has not yet recovered to its pre-pandemic level. Britain’s Office for Budget Responsibility said last week that households were facing the biggest drop in living standards on record as the economy entered recession.
The Paris-based body also lashed out at the UK government’s pledge to keep the average household energy bill at £2,500 by April, saying untargeted support would “add pressure to already high inflation in the short term”, driving up interest rates and debt. Service charges.
The OECD said business sentiment was starting to recover from a “period of deterioration driven by policy uncertainty” – a sign of the hastily reversed “mini” budget under former prime minister Liz Truce. But he says “lagged uncertainty”, along with higher costs of capital, will continue to weigh on business investment.
The OECD said risks to the UK’s already weak outlook were “significant and tilted to the downside”. It specifically noted the risk that acute labor shortages “could force companies to make more permanent reductions in their working capacity or further push up wage inflation”.
In general, the OECD said the world economy is “recovering” from the biggest energy shock since the 1970s. According to its latest forecasts, growth in almost every major economy will be weaker next year than thought in June, as persistently high inflation erodes people’s spending power.
The OECD expects the US and euro area to grow by just 0.5 percent next year, with Germany slipping into recession and more resilient emerging economies driving global expansion of 2.2 percent.
The body warned that the energy crisis was “here to stay”, with Europe facing even greater risks than the current one of gas shortages next winter, which could push it into recession.
Although the OECD expected inflation to ease next year, particularly in the US and Brazil, it thought consumer prices across the euro area would rise by 6.8 percent in 2023 and 3.4 percent in 2024.
“Fighting inflation should be our top priority,” Santos Pereira said, adding that central banks are “doing what they need to do” but that governments need to scale back untargeted fiscal support that is adding to inflationary pressures.
“Inflation is definitely getting a lot worse . . . it’s not going to come down as fast as we’d like, he added: “We see light at the end of the tunnel, but it’s a long tunnel.”
Following its criticism of the UK’s energy support scheme, the OECD said France, Germany and other countries also needed to phase out measures that kept energy prices artificially low for everyone and instead offer more targeted income support to vulnerable households.
He argued that creating incentives to save gas is vital if Europe is to be protected against energy shortages and an even worse economic shock next winter.
So far, gas storage levels have remained high across the EU, helped by mild weather. The OECD assumes that a significant disruption can be avoided if energy consumption remains about 10 percent below its five-year average, but said it was unclear whether demand could be met in a normal winter.
Santos Pereira said if Chinese demand for liquefied natural gas picks up with the lifting of the Covid-19 lockdown, it could prove more difficult to replenish storage capacity next year and a cold winter could lead to shortages. In turn, higher energy prices can become more disruptive and persistent.
“Europe will certainly be in recession this year if we have a cold winter. . . next winter, the same may apply,” he said.
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