Outlook for UK exports remains difficult as OECD calls on Germany to do more to avoid deflation in the euro area
Despite what's been going on elsewhere, the growth prospects for the UK have been improving steadily during 2013. The Organisation for Economic Co-operation and Development in Paris is the latest body to note that activity will be stronger in 2014 than previously envisaged. Growth of 2.4% next year, if achieved, would be the strongest since 2007.
The improvement in the UK outlook is entirely due to a pick-up in the domestic economy, fostered by the Bank of England's cheap money policy, the Help to Buy boost to the housing market, the willingness of consumers to run down their savings to fund spending, and a slowdown in austerity to reflect weaker growth over the last couple of years. If anything, events in the rest of the global economy are hindering rather than helping the UK.
The OECD has concerns about policy gridlock in Washington, about the impact on emerging economies of the gradual withdrawal of the Federal Reserve's bond-buying stimulus programme, and of the threat that the euro area could become the new Japan, locked into a vortex of deflation and rocketing public debt.
Indeed, the strongest words in the thinktank's half-yearly snapshot of the global economy are reserved for European policymakers. The OECD calls on Germany to do more to help the struggling members of the euro area to grow faster by liberalising its services sector. Even more provocatively, the OECD says the European Central Bank should consider supplementing low interest rates with its own version of quantitative easing – buying bonds to drive down long-term interest rates.
"Risks of deflation may be slowly increasing," says OECD chief economist Pier Carlo Padoan. "The ECB must be very careful and be prepared to use even non-conventional measures to beat any risk of deflation becoming permanent."
The OECD says stronger investment and exports will help boost UK growth from 1.4% in 2013 to 2.4% in 2014. Some rebound in investment is to be expected given the rebound in consumer and business confidence, but the outlook for exporters remains difficult. It is entirely possible that the OECD is still too pessimistic about the UK's short-term growth prospects and that further upward revisions will be needed over the coming months.
That, though, will present its own risks. Quite rightly, the OECD is worried about possible overheating in the housing market, saying there is an urgent need for the supply of new homes to increase in line with rising demand. Rising house prices, it adds, are a double-edged sword: they can make people feel wealthier but they can also leave first-time buyers saddled with heavy debt burdens.
Finally, the OECD says the Bank of England needs to be alert to the medium-term threat of rising inflation. For the moment, the bank can justify ultra-low interest rates because the deep recession left a pool of unused and under-used capacity. Only when this slack has been used up will price pressures start to become apparent. The OECD's fear is that there is less slack than the bank thinks.