British economy 'best in G7' but outlook is still gloomy

Published on Thursday 9 September 2010 15:41

THE British economy is set to fare better than its rivals in the G7 nations in the third quarter of the financial year, international forecasters claimed yesterday.

•The Bank of England: further quantative easing could be on the cards

But the latest report from the Organisation for Economic Co-operation and Development (OECD) painted a gloomy overall picture for the seven major economies and warned more central bank support may be needed.

It warned that governments may need to pump more money into their economies through central banks and that there was long-term uncertainty over the health of their finances.

However, it suggested that the UK economy would see the highest level of growth at 2.7 per cent compared to an average of 1.4 per cent across the seven economies.

Even though the UK economic growth is then predicted to fall back to 1.5 per cent in the fourth quarter, government sources yesterday claimed that the OECD report justified the Conservative-Liberal Democrat coalition's determination to accelerate reducing public debt.

Critics had claimed that the policy of taking almost 90 billion over the next four years out of the public sector and raising taxes such as VAT to 20 per cent could see the country plunged into a double dip recession.

Some government departments could be hit by enforced savings of up to 40 per cent to allow health and international aid spending to be protected and lessen the blow to education and defence budgets.

The OECD said the G7 slowdown was worse-than-expected and stressed policymakers may need to step in by extending measures such as quantative easing (QE), while governments could be forced to put austerity measures on hold.

The OECD forecast that growth in the G7 economies would slow to 1.4 per cent in the third quarter after expansion of 3.2 per cent and 2.5 per cent in the first and second quarters respectively.

The highly respected Paris-based think-tank believes gross domestic product (GDP) will pull back to 1 per cent in the fourth quarter.

The OECD said: "It is not yet clear whether the loss of momentum in the recovery is temporary … or whether it signals greater underlying weaknesses in private spending at a time when policy support is being removed."

It noted: "On the other hand, if the slowdown reflects longer-lasting forces bearing down on activity, additional monetary stimulus might be warranted in the form of QE and commitment to close-to-zero policy interest rates for a long period.

"Where public finances permit, planned fiscal consolidation could be delayed," it added.

The report predicts third-quarter annualised quarter-on-quarter growth of 2.7 per cent in the UK, down from 4.9 per cent in the previous three months, but higher than all its European neighbours in the G7 and the US.

UK growth is expected to fall back to 1.5 per cent in the fourth quarter, although this is still among the strongest forecasts in the G7 block. America's forecast growth stands at 2 per cent in the third quarter and 1.2 per cent in the fourth.

Philip Shaw, economist at Investec Bank, said: "The economy does not yet have the ability to stand on its own two feet, particularly with the uncertainties over the effects of the forthcoming fiscal squeeze, and accordingly the first rise in rates looks some way off."

He added that further quantative easing could be on the cards, although the Bank of England's Monetary Policy committee is not expected to act until it gets sight of the Bank's next quarterly inflation forecast in November.

"However, barring the economy posting signs of a sudden lurch downwards, our central case is still that the committee will elect not to restart QE purchases and that the first rate rise will occur in the second quarter of next year," said Mr Shaw.

Despite the overall gloomy picture painted by the OECD, stock markets made strong gains on both sides of the Atlantic yesterday as positive US economic data helped ease recovery fears.

The FTSE 100 Index climbed 64.4 points to 5,494.2, overcoming wobbles earlier this week on nerves over Europe's sovereign debt crisis and the shock of two high-profile leadership changes at blue chip banks.

America's Dow Jones Industrial Average was up in early trade as investor sentiment received a boost from news of a drop in US unemployment claims to 451,000.