Published : 5 days ago, on 04/12/2024

By Andy Bruce

(Reuters) – The OECD on Wednesday bumped up its growth forecast for Britain’s economy next year, citing a surge in government spending that is also likely to push inflation to the top of the G7 charts.

While the Paris-based Organisation for Economic Cooperation and Development trimmed its expectation for this year to 0.9% from 1.1%, it raised its 2025 forecast for British economic growth to 1.7% from 1.2% previously.

Excluding wild swings in output that took place during the COVID-19 pandemic, such an outcome would represent the fastest growth since 2017, with only Canada and the U.S. forecast to grow faster next year by the OECD.

Finance minister Rachel Reeves welcomed the upgrade, saying it made the UK the fastest growing European economy in the G7 over the next three years, based on the OECD’s forecasts.

“That is only the start. Growth only matters if it’s matched by more money in people’s pockets,” she said.

But the OECD warned that the pickup was likely to be fleeting, with growth set to slow to 1.3% in 2026.

Government consumption and investment will boost growth in 2025, owing to front-loaded fiscal loosening, before the increase in taxes starts weighing on private consumption and additional government borrowing needs crowd out business investment,” the OECD said in its latest global outlook.

Reeves announced big increases to government spending and investment in her Oct. 30 budget, paid for by higher state borrowing and hiking taxes on employers – something that has dented business confidence.

The OECD said British inflation was likely to average 2.7% in 2025 – higher than in any other G7 country.

“Domestic price pressures remain,” the OECD said, citing strong wage growth compared with peers and elevated services inflation.

The report showed housing rents in Britain increased during the year to October by more than in any of the more than 20 OECD countries listed.

With public finances stretched, the OECD warned that Britain had limited capacity to deal with potential shocks to the economy in future.

These include increases in global energy prices, given UK households’ reliance on natural gas. Moreover, persistent price pressures on the back of the strong increase in government expenditure… could require the monetary stance to remain tighter for longer,” the OECD said.

(Editing by Jan Harvey and William Schomberg)