Rising inflation and weak wage growth will leave Britain rooted to the bottom of the league table for living standards among the west’s richest countries in 2018, the Organisation for Economic Co-operation and Development has warned.
In the last piece of economic news before the general election, the Paris-based thinktank said the next government would spend the first 18 months of the next parliamentary term presiding over a severe squeeze on real incomes.
The OECD said inflation at 2.7% during 2018 would dwarf wage growth of 1.5% and result in the UK have the weakest real income performance, alongside Finland, of any of its 34 rich member states.
The TUC general secretary, Frances O’Grady, said it was alarming that UK workers would face the biggest real wage fall of any advanced economy in 2018, while other OECD members, with the exception of Italy and Mexico, would experience real wage increases in 2018.
She said: “Boosting wages has to be a top priority for whoever gets the keys to Downing Street. British workers still haven’t recovered from the last financial crisis. The last thing they can afford is another hit on their finances.”
The west’s leading economic thinktank has predicted a tentative recovery for the global economy this year and next but warned of risks from fragile trust in government, weak wage growth and persistent inequality.
In its latest health check on growth prospects, the Organisation for Economic Cooperation and Development described the outlook for the global economy almost a decade on from the financial crash as “better, but not good enough”.
The Paris-based organisation nudged up its forecasts for global growth this year. But it trimmed its outlook for the US, to show growth accelerating a little more gently than in its previous assessment in March.
The OECD made no changes to previous predictions that the UK will suffer a Brexit-related slowdown, with growth easing from 1.8% in 2016 to 1.6% this year and just 1% in 2018.
But after being a strong supporter of austerity measures to curb Britain’s budget deficit after the end of the 2008-09 recession, the thinktank said it was time for a different approach.
“The budget deficit is projected to remain broadly unchanged this year, but fiscal consolidation is planned for 2018 despite a weaker growth outlook. Instead, further fiscal initiatives to increase public investment should be considered to support demand in the near term and boost supply in the longer term,” it said.
Labour seized on the report as evidence of OECD backing for its proposal to bolster public borrowing for investment by £250bn over the next decade. The shadow chancellor, John McDonnell, said the thinktank’s conclusion was “a hammer blow for the Tories’ economic credibility”.
He added: “The OECD’s call for increased investment in our economy is a ringing endorsement of Labour’s economic policy in this election, and shows the clear choice voters have on Thursday.”
Referring to the UK’s decline in GDP growth in the past six months, Catherine Mann, the OECD’s chief economist, said recent data had been poor and the benefit of the lower pound for exporters was offset by inflationary pressures from higher import prices hitting disposable incomes.
“We are concerned about the purchasing power for consumers in an environment where the pass through [from higher import prices] seems pretty robust,” she said.
After 3% growth in 2016, the global economy is expected to expand by 3.5% this year and 3.6% in 2018. That compares with previous forecasts of 3.3% and 3.6% respectively.
“After many years of weak recovery, with global growth in 2016 at the lowest rate since 2009, some signs of improvement have begun to appear,” Mann wrote in the OECD’s latest outlook report.
After June’s EU referendum result, the OECD was, like many forecasters, forced to backtrack on its warning that the UK would suffer instant damage from the Brexit vote. Its latest outlook noted there was support for UK growth from low interest rates and from planned spending cuts being pushed back.
But echoing recent signs that consumers have become more cautious, the group said the pound’s sharp drop since the Brexit vote had pushed up inflation, denting household income growth and household spending. It also warned business investment would decline sharply, amid continuing uncertainty about the future relationship between the UK and the EU.