The OECD expects the UK economy to outperform the eurozone and grow by 1.4 per cent over the year. But there is a downside to the Organisation for Economic Co-operation and Development’s latest figures: the body expects the UK’s inflation problem to persist, ending this year at 3.5 per cent, down just a touch from the 3.8 per cent measured by the ONS (Office for National Statistics) in July and August. It predicts that inflation will be 2.7 per cent at the end of 2026 – still a long away from the Bank of England’s two per cent target. Inflation in Britain is due to be markedly higher than in the eurozone, where the OECD expects inflation to end 2025 on 2.1 per cent and 2026 on 1.9 per cent. Among OECD countries, the UK is expected to have higher inflation than any, except Argentina (39.8 per cent), Turkey (33.5 per cent), Russia (8.5 per cent), Brazil (5.2 per cent) and South Africa (4.4 per cent).
Britain has a long-established reputation for leading other developed nations on inflation. While not quite in banana republic territory, it is an uncomfortable place to be – not least because a quarter of UK public debt is index-linked.
Britain’s debt problems are beginning to look more serious than those of other countries which have lower ratios of debt and deficit to GDP. There is little sign, either, of much effort being put into bringing inflation down. The Bank of England remains complacent, as it has been ever since Andrew Bailey became Governor in 2020, if not before. The government keeps handing out above-inflation pay rises to public sector workers, even though productivity is all but static.
Much of the focus in Britain in recent months has been on low-growth. Yet Britain has been doing relatively well by international comparisons (although that is not saying much at the moment). The danger of inflation attracts relatively little comment, but sooner or later the government and Bank of England are going to have to answer why it is that Britain is becoming an outlier on inflation, and that the Bank seems to be happy to tolerate the CPI (Consumer Prices Index) being way over target.
The OECD’s latest Economic Outlook, published this morning, also reveals something else: Donald Trump’s tariff wars have not as yet had anything like the devastating effect on the global economy as many feared they would have. The OECD has upgraded its forecast for global growth in 2025 from 2.9 per cent to 3.2 per cent. The OECD does not now expect a recession in any member state in 2025, although it has just downgraded its forecast for Germany, which it now expects to grow by 0.3 per cent over the course of the year, down from the 0.4 per cent it forecast in June. Most countries, however, have had their forecast upgraded compared with three months ago, with the UK economy expected to grow by 1.4 per cent over the year, up from 1.3 per cent.
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