The United Kingdom's economy is displaying "robust" growth, although it remains vulnerable to "lingering" inflation, according to the latest biannual report from the Organisation for Economic Co-operation and Development (OECD).
The Paris-based think tank has upgraded its forecast for the UK's gross domestic product (GDP) for both this year and next, despite global economic uncertainties.
In its revised outlook, the OECD projects UK GDP to rise by 1.1% this year, surpassing the collective growth of the euro area. This marks a significant improvement from the 0.4% growth forecast made in May for 2024. The UK’s economic prospects have received one of the largest upgrades among the OECD's 38 member nations.
However, the OECD cautioned that these predictions are contingent on global events, referencing a series of disruptions over recent years, including the COVID-19 pandemic, Russia's invasion of Ukraine, and the ongoing conflict in the Middle East.
The UK's improved forecast is largely attributed to better-than-expected economic performance during the first half of 2024, when the country emerged from a mild recession that had gripped the second half of the previous year. Economists widely blamed the downturn on the Bank of England's aggressive interest rate hikes, aimed at tackling inflation.
Despite this, the OECD warned that inflation remains a persistent risk for the UK, driven by a high pace of wage growth and continued pressure from services price inflation. The Bank of England has echoed these concerns, signalling a cautious approach to future interest rate cuts following a modest reduction from 5.25% to 5% in August.
Looking ahead, the OECD anticipates UK growth to accelerate slightly to 1.2% in 2025. However, the future economic landscape remains uncertain as the newly elected Labour government, led by Prime Minister Rachel Reeves, prepares to unveil its first budget on 30 October.
Commenting on the OECD's findings, Chancellor Rachel Reeves welcomed the positive growth figures but acknowledged the challenges ahead. "Faster economic growth figures are welcomed, but I know there is more to do and that is why economic growth is the number one mission of this government," she said. "Next month's budget will be about fixing the foundations, so we can deliver on the promise of change and rebuild Britain."
While the UK's outlook has brightened, the OECD report paints a bleaker picture for Germany, Europe's largest economy, which is expected to grow by just 0.1% this year. Germany's struggles, largely tied to a sluggish manufacturing sector and a slowdown in China, have weighed on the broader euro area's growth, which remains unchanged at 0.7%.
In response to the region's economic challenges, the European Central Bank is anticipated to implement two more interest rate cuts this year to stimulate activity. Across the Atlantic, the US Federal Reserve recently made its first interest rate cut since 2020 amid concerns over a slowdown in hiring. The OECD predicts US GDP will slow to 2.6% this year, though it expects monetary easing to cushion the impact.
The OECD report highlights ongoing risks to global growth, warning: "Significant risks remain. Persisting geopolitical and trade tensions could increasingly damage investment and raise import prices. Growth could slow more sharply than expected as labour markets cool, and deviations from the expected smooth disinflation path could trigger disruptions in financial markets."
On a more optimistic note, the OECD suggested that a recovery in real incomes could strengthen consumer confidence and spending, while further declines in oil prices could accelerate disinflation.
The report concludes by urging governments to take "decisive fiscal actions" to ensure debt sustainability and create financial flexibility to respond to future shocks. "Stronger efforts to contain spending and enhance revenues, set within credible medium-term adjustment paths, are key to ensuring that debt burdens stabilise," the report added.
As the global economy navigates ongoing uncertainties, the UK's performance will remain closely watched, with many hoping that the country's newfound growth momentum will be sustained.
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