OECD downgrades UK growth forecast

BRITAIN'S return to economic stability will occur at an even more sluggish pace this year than previously expected, one of Europe's most influential think-tanks yesterday warned.

The Paris-based Organisation for Economic Co-operation and Development (OECD) dealt a blow to the nation's economic prospects by downgrading its 2011 growth forecasts for the second time, to 1.4 per cent from 1.5 per cent. It warned that growth would be hampered by the squeeze on household budgets from high commodity prices and unemployment, which is likely to remain above 8 per cent for the next two years.

The group also further muddied the waters on interest rate strategy, warning the Bank of England that the cost of borrowing will need to rise before the end of the year to ward off high inflation.

The OECD's second GDP downgrade, which is substantially less than the Office for Budget Responsibility's forecast of 1.7 per cent growth, came as the Office for National Statistics (ONS) confirmed that the economy only expanded by 0.5 per cent during the first quarter.

Economists cautioned that the ONS's second GDP estimate revealed some worrying trends on consumer spending.

Household spending fell by 0.6 per cent between the final quarter of 2010 and the first three months of this year - the largest decrease for seven quarters. The Centre for Economics and Business Research (CEBR) said the trend heightened its expectations of a "double-dip" in consumer spending this year.

Currently, the City expects an interest rate rise in November, but departing monetary policy committee member Andrew Sentance warned in a valedictory speech yesterday that the Bank of England needs to move soon or it risks losing its credibility on managing inflation and households will have to suffer very sharp hikes in the future.

Sentance, who leaves the MPC at the end of the month and who has been pushing for an immediate 0.5 per cent rise in rates, told an audience in Jersey: "Continuing to accommodate inflation makes it more likely that a future sharp policy correction will be needed, particularly if persistent high inflation becomes embedded in wage and price-setting."

His comments were in stark contrast to warnings this week from MPC dove Paul Fisher, who told The Scotsman he was "nervous and worried" about the pressures facing households and it wouldn't be "right" to add to these with an interest rate rise.

The OECD has also revised down growth expectations for next year, from 2 to 1.8 per cent. By comparison, the OBR expects 2.5 per cent growth in 2012.