Britain's economy will grow much more slowly than previously thought next year, and finance minister George Osborne should be ready to abandon a key debt target if growth weakens further, the OECD said on Tuesday.
The Organisation for Economic Cooperation and Development (OECD) predicted that Britain's economy would shrink 0.1 percent this year and grow just 0.9 percent in 2013 - much weaker than the 1.9 percent growth next year that it forecast in May.
While the downgrade in the OECD's forecasts brings them broadly into line with those from private-sector economists, it will still be bad news for Osborne, a week before he presents a half-yearly economic update.
“Real GDP growth is projected to rise gradually during 2013 as falling inflation boosts purchasing power and private consumption, and a brighter international environment supports exports and investment,” the Paris-based body said.
But it added that risks were mainly on the downside, noting dangers from a weaker world economy, global financial turmoil, blows to household and business confidence, and higher food and energy prices.
The OECD indicated that if Britain's economic growth turns out weaker than expected the government could ease its austerity drive in the short term, even if that meant missing a key target: to get the country's public sector net debt falling as a share of national output by the 2015-16 fiscal year.
“In the event of lower than expected growth, the flexibility of the fiscal mandate should be utilised to allow the automatic stabilisers to continue to operate, even though this may imply pushing out the debt target,” the body said.
Medium-term structural consolidation plans should be maintained “to ensure credibility”, it added.
There is room for the government to change the composition of its spending to focus on long-term growth-enhancing public investment, including in infrastructure, the OECD said.
The agency left its consumer price inflation forecasts unchanged at 2.6 percent in 2012 and 1.9 percent in 2013. - Reuters