OECD forecasts modest growth for UK economy

The OECD released its latest Economic Outlook today, setting out its forecasts for developments in its member countries. It is supportive of the UK government’s fiscal tightening, describing it as “substantial but necessary”, but warns that it will, when combined with weak real income growth, mean moderate output growth over the next two years.

The OECD released its latest Economic Outlook today, setting out its forecasts for developments in its member countries. It is supportive of the UK government’s fiscal tightening, describing it as “substantial but necessary”, but warns that it will, when combined with weak real income growth, mean moderate output growth over the next two years.

After real GDP growth of 1.8 per cent in 2010, it forecasts 1.7 per cent growth in 2011 and 2.0 per cent growth in 2012. This would represent a disappointing pace of recovery from the deepest recession in the UK since the 1930s.

The UK’s long-run average growth rate is 2.5 per cent and above-trend growth would normally be expected in the early years of a recovery. As a result of the modest pace of growth, the OECD only expects unemployment to fall from 7.9 per cent this year to 7.6 per cent in 2012.


Like the Office for Budget Responsibility, the OECD believes that UK growth over the next two years will benefit from a strong trade performance. Net exports (the contribution of exports less imports to growth) are forecast to add 0.4 per cent to growth in 2011 and 0.5 per cent in 2012. If this happens, it will be a remarkable (though not unprecedented) turnaround from this year, when net exports are likely to have subtracted 1.0 per cent from growth.

One obvious risk is that this does not happen, causing growth to undershoot the OECD’s forecasts, in which case unemployment is unlikely to fall. The UK cannot look to strong demand overseas to boost its recovery. Although the OECD area as a whole is expected to grow by 2.3 per cent in 2011 and 2.8 per cent in 2012, the euro area – by far the UK’s most important export market – is forecast to grow in line with the UK economy.

For those who like league tables, the OECD’s forecasts put the UK fourth out of the G7 in terms of the growth outlook. Canada, the US and Germany are expected to perform better; France much the same as the UK; and Italy and Japan worse.

Overall, it is not a very exciting prospect. Mervyn King, Governor of the Bank of England, has been warning us for a couple of years now that the next decade will be disappointing compared to the period from 1997 to 2007. This is what he meant.

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