Thinktank cuts growth forecast for UK following austerity measures and says unemployment could rise to 9.1% by 2013
The west's leading economic thinktank has warned that Britain faces sliding into a double-dip recession this winter.
In disappointing news for George Osborne as he puts the finishing touches to Tuesday's autumn statement, the Organisation for Economic Co-operation and Development (OECD) said output would fall in the final three months of 2011 and the first quarter of 2012.
The Paris-based OECD said it expected the UK to grow by 0.5% in 2012 as a whole but the two consecutive quarters of contraction fulfil the technical definition of a recession. In its half-yearly healthcheck on the global economy, the thinktank cut its growth forecasts for all the west's major economies and urged policymakers to take urgent action to prevent the contagion spreading from Europe's sovereign debt crisis.
The OECD said in May that it expected the UK to grow by 1.8% next year, but said on Monday that it was sharply downgrading its forecast because public spending cuts, the squeeze on household incomes and a more difficult climate for exporters had weakened the economy.
"More support is needed urgently as headwinds are strong," the OECD report said. It warned that unemployment would rise to 9.1% by 2013, exacerbating social problems and leading to a rise in homelessness.
The OECD has been supportive of the chancellor's austerity programme and said the onus for boosting growth should be on the Bank of England – suggesting that Threadneedle Street should expand the money supply through its quantitative easing (QE) programme next year.
The Bank announced in October that it was increasing its purchases of government gilts from commercial banks to £275bn over the coming months, but the OECD said growth would be even weaker than it expected unless the total amount of QE was raised to £400bn. That would leave the Bank with almost 40% of the total stock of outstanding government bonds.
The OECD said Osborne should stick to his budget strategy unless the economy deteriorates more than expected. Were that to happen, the thinktank said the government would be justified in softening planned public investment cuts
"Credibility will demand that the medium-term fiscal targets be retained and achieved, implying greater tightening later on," the OECD report said.
If things turn out to be worse than feared, banks may need to be recapitalised, preferably with private money. However, governments must be prepared to step in, the OECD said.
David Tinsley, UK economist at BNP Paribas, said: "With the domestic demand in the UK already very weak heading into the crisis, it is hard to see where any growth next year will come from."
The OECD said it was now forecasting just 0.2% growth in the eurozone next year and added that concerns about sovereign debt sustainability were becoming increasingly widespread. Unless the problem was addressed, the contagion could spread to countries thought to have sound public finances, causing a massive escalation in economic disruption. Pressures on bank funding and balance sheets increase the risk of a credit crunch.