OECD Predicts Improved Economic Growth Prospects For The UK

The Organisation for Economic Co-operation and Development (OECD) recently stated that the Bank of England (BoE) made the correct decision when it decided to slash interest rates in the aftermath of the Brexit vote.

OECD has revised its forecasted growth rate for the UK, moving it from the earlier 1.8 percent to 2 percent for 2016 and from 1 percent to 1.2 percent for 2017 in its latest review.

The economic think tank said that the BoE’s measures taken since the referendum have boosted consumer confidence.

The BoE released a raft of monetary easing measures such as a 0.25 percent rate cut, a fresh round of quantitative easing and new funding scheme after the vote to give the economy a boost. So far the results have been positive –the stock market has rallied as have various economic indicators.

AP Archive

Despite the optimistic outlook, the OECD has warned that the ensuing higher rates of inflation from Brexit could dampen economic growth in coming years.

In a statement, OECD said,

Higher inflation is projected to hit households' purchasing power and to reduce corporate margins, weakening private consumption and investment. As growth slows, the unemployment rate is projected to rise. The unpredictability of the exit process from the European Union is a major downside risk for the economy.

The shock vote to quit Europe in the June referendum is likely to result in increased inflation next year given the declining value of pound against the dollar (almost 18 percent) and against euro (around 11 percent). OECD has also cautioned that the Brexit vote is likely to result in GDP loss of around 3 percent by the end of the decade and will also affect employment.

The weakening economic growth will cause UK's unemployment rate to reach over 5 per cent, although the current account deficit will see a drop due to the boost in exports thanks to the pound crashing.

For the major European economies of France and Germany, OECD has revised growth rates and reduced them by 0.1 percent, setting them respectively at 1.2 percent and 1.7 percent. In case of the U.S, the think tank has revised its growth estimate upwards for 2016 to 1.5 per cent in light of Donald Trump’s victory. China on other hand will see a decline in growth in 2017, going from 6.7 per cent this year to 6.4 per cent in 2017, but the growth rate is still better than anticipated.

Overall the OECD has stated that world economy was in a low growth phase. It has retained global growth rate estimates of 2.9 per cent for this year but has upped the forecast for next year, moving it from 3.2 per cent to 3.3 percent.

Charlie Harrison

More articles by Charlie Harrison