OECD downgrades British growth forecast before key budget

16th March 2011, Comments 0 comments

Britain's economy will grow 1.5 percent this year owing to "significant headwinds" in 2011, the OECD said Wednesday in a downgraded forecast published one week before the country's annual budget.

The Organisation for Economic Cooperation and Development said Britain's recovery that began in late 2009 "faces significant headwinds during 2011, which can be mitigated by monetary policy remaining supportive."

The Paris-based policy and research body for governments of 34 leading economies praised the coalition's bid to cut Britain's huge deficit but said "recovery and job creation would both benefit from smaller-than-planned cuts in public investment."

The OECD forecast British gross domestic product growth of 1.5 percent in 2011, down from a previous estimate of 1.7 percent. It predicted GDP of 2.0 percent in 2012, unchanged from the body's November forecast.

Britain's Conservative-Liberal Democrat government, which announces its 2011-12 budget on March 23, has forecast GDP growth of 2.1 percent this year and 2.6 percent in 2012.

But analysts say such estimates are too optimistic, given the size of its cost-cutting plans to reduce a huge deficit.

Finance minister George Osborne on Wednesday said his budget's message would echo the OECD's report -- that "this government has set the right course for the British economy, but we have still much more to do."

OECD Secretary-General Angel Gurria added during the survey's release in London: "By taking hard, though necessary, decisions now, the UK is ensuring that it can continue to provide the British people with effective government services in the future.

"To counter some of the negative impact, monetary policy should remain expansionary to support the recovery, even if headline inflation is currently above target."

In a bid to support recovery, the Bank of England (BoE) has kept its key interest rate at a record low 0.50 percent since March 2009 and has injected £200 billion (235 billion euros, $322 billion) into the economy.

"With policy rates close to zero, quantitative easing (QE) at £200 billion (14% of GDP) and liquidity schemes still in place, monetary policy is highly expansionary," the OECD pointed out in its study.

Interest rates "should rise only slowly from mid-2011 onwards as long as inflation expectations do not drift too far from the target," it added.

The BoE is maintaining record-low rates as soaring commodity prices pushed up British annual inflation to a two-year high of 4.0 percent in January, double the central bank's target.

The OECD meanwhile said that QE "should be withdrawn in an orderly and pre-announced fashion once policy rates have risen from their current low level.

"The BoE will, however, need to react sooner if inflation expectations begin to rise considerably or feed through to significant wage increases."

It added that "recovery is likely to remain subdued in 2011, as the necessary fiscal tightening and a fading rebound in world trade create headwinds, before picking up again in 2012."

The British economy suffered a shock contraction in the final three months of last year, although the BoE has said that the country is likely to avoid a double-dip recession.

Gross domestic product shrank by 0.6 percent in the three months to December, according to recent official data which partly blamed freezing wintry weather late last year.

Meanwhile, the number of unemployed people in Britain reached a 17-year high of 2.53 million in the three months to January, official data showed Wednesday.

© 2011 AFP

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