UK growth upgraded but OECD warns of deepest economic scar in G7
Thinktank feels Brexit and Covid-19 mean Britain could take bigger economic hit over next few years
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Last modified on Mon 31 May 2021 07.31 EDT
The UK economy will post its fastest growth since the second world war this year but also faces deeper economic scarring than other major economies, the Organisation for Economic Co-operation and Development (OECD) has predicted.
In its latest economic outlook, the Paris-based thinktank sharply upgraded its view for UK growth, thanks to the success of the Covid-19 vaccination programme.
It forecasts UK GDP will rise by 7.2% in 2021, the fastest growth since 1941, after a 9.8% contraction in 2020 – the worst in almost 300 years. Back in March, it had forecast UK growth of 5.1% this year. For 2022, growth has been revised significantly higher, too – to 5.5%, from 4.7% three months ago.
However, the OECD also warns that the UK could suffer a bigger economic hit over the next few years than other G7 industrialised nations because of the impact of Brexit and the pandemic.
The OECD said the UK’s services sector would rebound briskly this year as retailers, pubs, restaurants and other hospitality businesses reopened after the lockdown.
“The progressive easing of public health restrictions will allow for a solid rebound,” the OECD explained. “Consumption will bounce back sharply as hard-hit hospitality services and retail trade reopen.”
The OECD also predicts that households will spend some of the savings accrued during the lockdown – but cautions that the less well-off families have suffered more from the coronavirus pandemic.
“Some additional spending by wealthier households with secure jobs and excess savings during the crisis is projected to be counterbalanced by households in lower-income brackets who saved less during the crisis and are set to be more affected by a weak labour market and the winding down of Covid-19 supports.”
The UK’s unemployment rate is forecast to rise to 6.1% by the end of the year as the furlough scheme ends, up from 4.8% in the first quarter of 2021.
The report also warns that “increased border costs following the exit from the EU single market will continue to weigh on foreign trade”.
The OECD said: “Trade contracted in early 2021 as a consequence of leaving the EU single market and containment measures but will recover slowly.” It added that a closer relationship with the EU, particularly for services trade, would improve the UK’s medium-term economic outlook.
Official figures last week showed that UK-EU trade fell by almost a quarter at the start of 2021, compared with 2018.
The OECD has also raised its forecast for the world economy this year, with widespread vaccination deployment allowing firms to reopen and the US president Joe Biden’s stimulus plans boosting global demand.
It predicts global growth of 5.8% this year and 4.4% in 2022, up from 5.6% and 4.0% respectively back in March.
The US is forecast to grow by 6.9% this year, up from the 6.5% forecast in March, while eurozone growth has been upgraded to 4.3%, from 3.9%.
However, the OECD’s chief economist, Laurence Boone, said that the recovery was uneven, with “lots of frictions”. She warned that new Covid-19 variants could derail the recovery, underlining the importance of ensuring emerging economies are vaccinated, too.
“It is very disturbing that not enough vaccines are reaching emerging and low-income economies. This is exposing these economies to a fundamental threat because they have less policy capacity to support activity than advanced economies,” Boone said.
As long as the vast majority of the global population is not vaccinated, the whole world remains vulnerable to the emergence of new variants, she added.
“Confidence could be seriously eroded by further lockdowns, and a stop-and-go of economic activities. Firms, so far well protected but often with higher debt than before the pandemic, could go bankrupt. The most vulnerable members of society would risk further suffering from prolonged spells of inactivity or reduced income, exacerbating inequalities, across and within countries, and potentially destabilising economies.”
Scientists have warned UK ministers that a third wave of coronavirus may have already begun in Britain, which could hit plans to lift England’s lockdown restrictions in three weeks’ time.
The OECD also examined how much potential output has been lost because of the coronavirus crisis, by comparing its latest projections for national income levels in 2025 with its pre-pandemic forecasts.
It found that Japan and Canada will only suffer small losses, while the US is likely to have even bigger national income than it previously thought because of massive fiscal support.
However, major eurozone members could experience a 0.3% annual decline in potential economic output, while the UK’s growth rate could be 0.5% a year lower than previously expected. The OECD said this was partly down to the impact of leaving the EU, as well as Covid-19.
“The United Kingdom could suffer the biggest reduction among G7 countries (a decline of 0.5 percentage point per annum), in part reflecting the additional adverse supply-side effects from 2021 following Brexit.”
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