UK growth forecast upgraded but OECD warns of deep scarring
- UK economy to undergo a stronger post-COVID recovery
- The Organisation for Economic Cooperation and Development (OECD) says UK faces deeper economic scarring than other G7 nations
- UK output upgraded to 7.2% for 2021
- According to new forecasts, Eurozone’s economy will grow by 4.3% in 2021
- US gross domestic product (GDP) expected to rebound by 6.9%
According to Organisation for Economic Cooperation and Development (OECD), Britain is on track to record the most substantial growth of any other G7 nation in 2021, with recovery driven by the UK’s vaccination campaign and UK Chancellor Rishi Sunak’s “Plan for Jobs.”
The GBP 160BN Plan for Jobs scheme aims to protect jobs, businesses and wages through tax cuts, direct grants, funding and a range of other initiatives.
Still, while Mr Sunak is optimistic about Britain’s post-pandemic growth, he cautioned about high debt, which at nearly 100% of UK gross domestic product (GDP) remains a cause for concern.
Despite looming concerns, the OECD expects UK GDP to expand by 7.2% this year, following a 9.3% contraction in 2020 – the steepest decline in three centuries.
If the OECD’s prediction is correct, this means that UK output would outpace other well-developed economies, including the United States, which is also forecast for a solid economic rebound in 2021.
The OECD has also upwardly revised growth forecasts for 2022, up from 4.7% in March to 5.5% heading into June.
However, the intergovernmental economic organisation warns that Britain could suffer more long-lasting economic damage compared to other G7 nations due to Brexit. Although the UK has seen rapid growth, the impact of the UK’s departure from the EU is yet to be fully seen.
On Monday, experts from Aston University in Birmingham found that Brexit has delivered an astonishing GBP 113BN blow to the UK services exports before the end of the transition period.
Given the widespread disruption to trade and the ongoing dispute over Northern Ireland protocol, the OECD expects the effects of Brexit to undermine the UK’s post-COVID recovery.
Although the UK is rushing to secure trade deals with other nations to make up for losing tariff-free access to the EU market, progress has been slow.
So far, International Trade Secretary Liz Truss has only engaged in post-Brexit trade negotiations with Australia, albeit the two nations are said to be on the brink of clinching a free trade agreement.
Based on the OECD’s predictions for national output in 2025, only the United States, Japan and Canada will suffer limited economic scarring post-COVID.
However, Eurozone members – France, Germany and Italy are more likely to undergo a smaller annualised contraction than the UK due to the impact of leaving the European Union.
UK economy predicted to be smaller post-Brexit
Although coronavirus lockdown easing and the COVID vaccine boost drive a solid economic recovery, the OECD believes that the UK economy could be 0.5% smaller than if it had maintained its EU membership.
The leading think tank noted that supply chain disruption and higher costs stemming from new post-Brexit rules and regulations would continue to dampen foreign trade in Britain over the long term.
Official figures published by the Office for National Statistics (ONS) last week have already revealed that UK-EU trade has slumped by 23% from 2018 levels, with exports to Ireland particularly hit.
Although the OECD recognises that a stronger relationship between the UK and the European Union (EU) would improve Britain’s medium-term economic outlook, recovery is still expected to be slow.
Separate data from the ONS has also shown that Brexit was the most cited cause for challenges to business in February 2021.
The UK government has labelled post-Brexit disruption as “teething issues” despite data from the ONS suggesting that Britain has a significant amount to overcome.
Still, pent-up demand following months of national lockdown should drive a strong recovery across key sectors of the UK economy, especially the services sector, with pubs, restaurants, bars and other hospitality businesses now open.
The Bank of England (BoE) also expects households to run down their savings more than in previous years in a post-lockdown spending boom.
According to Investec, the average UK household has accrued approximately GBP 4,300 in extra savings. Britons will be keen to access some of that cash to spend over the coming months, with life returning to normal.
BoE policymakers expect shoppers to spend a tenth of their savings in 2021, while a Bank of America survey points to a more considerable boost of one fifth.
However, the OECD warns that while consumption will rebound sharply, households in the lower-income brackets which have been hit hard by the impact of the pandemic and saved less during the crisis will counterbalance the projected spending splurge.
The leading think tank also expects UK unemployment to hit 6.1% by 2021-end, with the conclusion of the furlough scheme expected to fuel a rise in joblessness.
The OECD also expects the number of jobless claims in the euro area to surge, predicting unemployment levels to hit 8.2% in 2021 and 7.9% in 2022.
However, growth predictions for Europe and other advanced economies such as the US have been upgraded, with widespread coronavirus vaccine deployment driving hopes of a stronger-than-expected economic recovery.
Global GDP bouncing back, but downside risks remain
The Organisation for Economic Cooperation and Development (OECD) has upgraded its forecasts for the global economy, predicting output growth of 5.8% in 2021 and 4.4% for 2022 versus previous estimates of 5.6% and 4%, respectively.
The International Monetary Fund (IMF) has also upgraded its outlook for global GDP, expecting growth of 6% this year versus previous projections of 5.5%.
The sharp upwards revision in growth has been driven by US President Joe Biden’s USD 1.9TN stimulus plan for the US economy and improved global vaccine rollout, with 1,904,306,875 vaccination doses administered worldwide thus far.
America and the Eurozone are also expected to undergo a more significant economic expansion this year. US growth forecasts up from 6.5% to 6.9%, and EU output upgraded to 4.3% from the 3.9% projection made in March.
However, the leading think tank believes it could take the Eurozone economy three years to return to pre-pandemic levels. The OECD argues that an increase in public investment and policy measures from the European Central Bank (ECB) will be crucial to the EU’s recovery.
OECD Chief Economist Laurence Boone said that while the EU’s economic prospects have improved, border closures’ and the initial disastrous COVID-19 vaccination programme will have a lingering impact on recovery.
The OECD commended government efforts to contain the virus and provided financial support but warned that the lack of vaccines in poorer countries, which have fewer resources for relief efforts, threatens to thwart economic recovery in developed countries.
Ms Boone expects global GDP to return to pre-pandemic levels by 2022 but notes that recovery will be uneven with significant “friction” due to the emergence of new coronavirus mutations.
In an Editorial of the firm’s latest Economic Outlook publication, Ms Boone wrote: “It is hugely worrying that less-developed and emerging economies are struggling to access coronavirus vaccines.
“As these economies have less capacity to deliver relief activity than advanced economies, they are further exposed to the threat of COVID-19.”
She went on to say that until most of the global population is inoculated, the entire world remains vulnerable to COVID-19, especially new strains of the virus.
Additional coronavirus lockdowns and social distancing measures will also undermine confidence and bring about the collapse of more businesses.
“The most vulnerable members of society are also economically and socially vulnerable as further COVID restrictions would expose them to prolonged spells of inactivity or reduced income, exacerbating inequalities across and within countries, and potentially destabilising economies”, said Laurence Boon.
Experts have already warned the UK government that the growing spread of the Indian variant, formally known as B.1.617.2, could trigger the third wave of COVID-19 in Britain and urged ministers to delay June 21st unlocking plans.
With emerging coronavirus strains posing a threat to many OECD nations, the think tank believes it will take over a year before living standards return to pre-crisis levels.
What is threatening the outlook for the global economy?
Looming over the brighter outlook for global GDP is mutant COVID-19 variants, coronavirus vaccine conditions in poorer economies and differences in household savings.
COVID variants pose a significant threat to economies and public health as new virus strains become increasingly resistant to vaccines and force governments to impose more draconian containment measures.
Another risk to global growth is higher inflation, which has a regressive effect on lower-income families as it pushes up the prices of consumer goods and reduces consumer spending.
If the rising costs of consumer goods outpace wage growth, central banks would be forced to raise interest rates to reduce inflationary pressures.
Ms Boone believes it could take some emerging and less-developed countries at least five years to recover from the coronavirus pandemic and urged advanced economies to open trade with these nations to give them a fighting chance to catch up.
Although fast-growing industries, the gradual restart of international travel, increased consumption, and a rebound in trade has allowed the world economy to recover to pre-COVID levels, global GDP is still below its pre-pandemic growth path.
The OECD’s Economic Outlook report called for stronger international cooperation on the vaccine rollout to ensure that poorer economies were not disadvantaged and help save lives.
The think tank stressed the importance of sharing knowledge and medical resources when tackling a pandemic and asked governments to remove trade barriers, especially healthcare products.
The report also noted that the uneven recovery in labour markets threatened a sustainable global economic recovery and called for the introduction of new policies that would support all aspects of the labour market.
Although they acknowledge that debt-to-GDP ratios are high, the report praised governments for their strong fiscal stimulus. It said that until vaccinations lead to a significant easing of restrictions, ongoing financial aid is warranted.
The OECD said that next year moderation would be appropriate as countries emerge from the pandemic and “transition toward better prospects.”