OECD warning on UK slowdown as cost pressures bite

● Brexit remains one of the main challenges, Paris-based think-tank says

The UK economy will slow in the coming years as Brexit uncertainty reins in growth and consumers are squeezed by higher prices and lower wages, the Organisation for Economic Co-operation & Development (OECD) has warned.

On the eve of the UK general election, the Paris-based OECD stood by its economic forecasts for UK gross domestic product (GDP), predicting it to slow from 1.8 per cent to 1.6 per cent for 2017, before dropping to 1 per cent in 2018.

The organisation also gave warning that weaker UK growth could drive the unemployment rate above 5 per cent. But while the OECD expects household consumption to ease, it said consumers would also use money normally earmarked for savings to keep spending in the face of higher inflation.

In its economic outlook, the group said: “Private consumption growth is projected to slow, as higher inflation holds back real earnings, but a weaker growth outlook should mitigate the extent of price pressures in the economy.

“Also, households are expected to continue to support their consumption by further reducing their saving rate.”

The OECD forecast that UK business investment was likely to be squeezed amid the economic uncertainty, with a knock-on effect on profit margins.

It said Britain’s exit from the European Union remained the “major risk” for the UK economy, with the impact of the divorce hinging on whether the UK manages to keep its strong trade links with the EU.

However, it added that the Brexit-hit pound was helping the nation’s overseas trade and backed exports to boost growth thanks to “improved competitiveness”.

Official figures last month showed the UK economy suffered an even deeper slowdown at the start of the year, as the key services sector – about 75 per cent of GDP – came under pressure.

The Office for National Statistics (ONS) said GDP grew by 0.2 per cent in the first quarter of 2017, revising down the figure from its initial estimate of 0.3 per cent. The pound’s slide since last June’s Brexit referendum is seen as having increased raw material costs for the manufacturing and retail sectors as well.

Inflation hit its highest level in nearly four years in April at 2.7 per cent. The Bank of England said last month that it expects inflation to peak at 3 per cent later this year. The UK jobless total fell by 53,000 to 1.54 million in the quarter to March, a rate of 4.6 per cent, the lowest since summer 1975, according to ONS figures published last month.

On the wider macro-economic picture, the OECD said the world economy was on course for a “modest pick-up”, with global GDP expected to reach 3.5 per cent for this year and 3.6 per cent in 2018.

The OECD saw an improved global outlook even though it downgraded its estimates for the US despite a weaker dollar boosting exports and tax cuts supporting household spending.