The UK is currently in the worst double dip recession in recent history, and its prognosis just got a lot worse, at least if you believe the OECD. It has poured cold water on the idea that the UK is crawling its way out of recession by forecasting that GDP will shrink 0.7% this year - a drastic u-turn from the 0.5% growth it predicted in May.
The Organisation for Economic Co-operation and Development, the venerable Paris-based institution whose roots go back to the Marshall plan of 1948, forecasts that the UK economy won’t return to growth until the final quarter of the year, and it will then expand by a fraction. The UK will be the worst performing G7 nation apart from Italy this year, the OECD said. Ouch.
The OECD suggested that countries suffering weak growth should cut interest rates if they are above zero and print more money. But if that was a hint to the Bank of England it was ignored, as the Bank yesterday decided to hold interest rates at 0.5% and leave its £375bn quantitative easing programme untouched.
There is a glimmer of hope on this horizon though – the OECD’s forecast doesn’t take into account the effects of the Olympics. It’s expected the feel-good factor brought by the Olympics will deliver longer term economic benefits through a rise in tourism and a boost in high street spending following TeamGB's success. Other forecasters even predict a significant bounce in GDP in the third quarter. And it shouldn't be forgotten that, like the IMF, the OECD is definitely towards the stimulus end of the economic austerity spectrum.
While the OECD’s grim forecast must be a blow to the government, Chancellor George Osborne insisted there were ‘positive signs’ that the UK is on the way to growing again. ‘Our economy is healing - jobs are being created, manufacturing and exports have grown as a share of our economy, our trade with the emerging world is soaring, inflation is down, much of the necessary deleveraging in our banking system has been achieved, and the world is once again investing in Britain,’ he told a CBI Scotland dinner in Glasgow. The question is, how long will this healing process take?