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UK lags global economic recovery

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UK economic growth will be slower than forecast by Chancellor Philip Hammond in the recent Budget, the OECD predicts.

It predicted economic growth would be 1.5% this year, 1.2% in 2018 and 1.1% in 2019, saying, “the growth slowdown is expected to continue through 2018, due to continuing uncertainty over the outcome of negotiations around the decision to leave the European Union and the impact of higher inflation on household purchasing power.”

It said this growth would be partly countered by an assumed agreement on a transition period after March 2019.

Last week, the Chancellor predicted the economy would grow by just 1.5% this year, 1.4% next year and then slip to 1.3% by 2019. This represented a drop from previous estimates of 2% for this year and 1.6% for next year.

UK weakness comes as the rest of the world is strengthening, said the OECD. It said: “Annual growth of the world economy is projected to improve slightly in 2018, but remains below the pre-crisis period and that of past recoveries. Longer-term challenges inhibit stronger, more inclusive, and more resilient economies.”

The OECD said employment rates are now above pre-crisis rates in many OECD economies and unemployment is falling, but this has yet to produce solid real wage gains. In the absence of a clear sign of change in underlying trends, growth across the OECD is projected to weaken in 2019.

“Growth has picked up momentum and the short-term outlook is positive, but there are still clear weaknesses and vulnerabilities,” said OECD secretary-general, Angel Gurria. “There is a need to focus structural and fiscal action on boosting long-term potential as monetary policy support is reduced. Countries should implement reform packages that catalyse the private sector to promote productivity, higher wages and more inclusive growth.”

Household and corporate debt in many advanced and emerging market economies remains high, which the OECD said could create vulnerabilities and raise questions about the sustainability of growth in the medium term. It said a sounder and healthier financial system would reduce the tax bias towards debt, deepen equity markets and improve the design of insolvency regimes. It added: “Removing tax subsidies for housing and making housing supply more fluid would mitigate the tendency to boom-and-bust cycles.”

The OECD projects that the global economy will grow by 3.6% this year, 3.7% in 2018 and 3.6% in 2019. This is a slight improvement on the last set of predictions made in September.

Of the developed markets, the euro area is projected to grow fastest (at 2.4% in 2017). US economic growth is estimated at 2.2% in 2017, rising to 2.5% in 2018. Growth in Japan is projected at 1.5%, slightly lower than the previous forecast.

In emerging markets, China growth is projected to be 6.8% in 2017 and 6.6% in 2018, as it rebalances towards a more consumer-led economy. Indian growth is projected to be 6.7%, while growth in the other major emerging economies Russia and Brazil, is likely to be lower, at 1.9% and 0.7% respectively.

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