(Bloomberg) -- The OECD upgraded UK growth forecasts for the next two years by more than any other Group of Seven nation, despite lingering concerns about underlying inflation pressures in Britain.
The British economy will expand by 1.1% this year after a “relatively robust” performance in recent months — making it the second-fastest in the G-7 after the US — and by 1.2% in 2025, the OECD said on Wednesday. In May, the Paris-based think tank had forecast growth of just 0.4% this year and 1% in 2025.
The combined 0.9-percentage-point upgrade was larger than for the other six G-7 members. That’s a boon for Prime Minister Keir Starmer, who was elected in July on a promise to achieve the fastest growth in the group of advanced economies.
Chief economist Alvaro Santos Pereira said the first half of this year had been “a lot stronger than we had forecast,” with the UK outpacing its G-7 peers with growth of 1.3% following a mild recession in 2023. Continued growth in real incomes will ensure household consumption will do “fairly well.”
Answering questions at a press conference, Pereira appeared to welcome reports that Chancellor of the Exchequer Rachel Reeves plans to update her fiscal framework to allow more investment.
“The UK needs more investment, so we need to create fiscal space to do so,” he said. Extra borrowing headroom is needed for infrastructure, “including the green transition.”
Still, the OECD’s latest forecast showed that the Bank of England faces the toughest job among the G-7 to keep inflation at the 2% target. Consumer prices will rise 2.7% on average this year and 2.4% in 2025, with core inflation stuck at 3.7% and 2.8% respectively, making the UK an outlier among G-7 peers.
The outlook suggests the BOE will have to move more slowly to cut interest rates than other central banks. The OECD’s interim economic outlook noted that the prices of over half the items in the UK inflation basket were still growing at an annual rate above 3% in July 2024. That was more than the US, where 40% of items were above the same threshold.
The OECD said risks to higher inflation could come from continued labor-cost growth. The newly installed Labour government has promised to further improve pay for workers on top of the 10% minimum wage increase approved by the outgoing Conservatives.
“Faster economic growth figures are welcomed,” Reeves said. “But I know there is more to do and that is why economic growth is the No. 1 mission of this government.”
--With assistance from Zoe Schneeweiss.
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