George Osborne’s deficit-slicing strategy gained backing from the Organisation for Economic Co-operation and Development, but the international thinktank called on the eurozone to turn to the printing presses to revive growth.
The OECD, which represents 34 of the world’s biggest economies, said the pace of the Chancellor’s fiscal tightening over the next two years was “appropriate and should be implemented as planned” in its latest economic outlook.
The verdict is far more supportive that last week’s International Monetary Fund comments that the UK was a “long way from a strong and sustainable recovery” and call on the Treasury to bring forward spending to offset cuts. But the OECD also trimmed its UK growth forecasts for this year and 2014 to 0.8 per cent and 1.5 per cent, down from 0.9 per cent and 1.6 per cent in its November forecasts.
The OECD said of the UK: “Further fiscal consolidation is necessary to restore the sustainability of public finances. The authorities’ medium-term underlying fiscal consolidation plans, together with the use of the automatic stabilisers, should help combine sustained consolidation with necessary flexibility to meet unexpected output shocks.”
But the body also cut its global growth forecasts from 3.4 per cent to 3.1 per cent this year with the eurozone the biggest threat to the world economy.
Chief economist Pier Carlo Padoan said the “dire situation” in the eurozone could necessitate money printing by the European Central Bank — a move likely to be bitterly opposed by the Bundesbank. The ECB has already cut interest rates to a record low 0.5 per cent but Padoan said more action was needed: “We think that the eurozone could consider more aggressive options. We could call it a eurozone-style QE.”
The OECD again slashed its forecast for the 17-member eurozone, pencilling in a 0.6 per cent decline this year on top of a 0.5 per cent fall last year. A year ago the body was predicting growth of nearly 1 per cent this year. Unemployment, already at a record high of 12.1 per cent, is not expected to peak until next year.
The ECB was also urged to consider cutting its deposit rate below zero, effectively charging commercial banks for holding their money overnight, encouraging banks to lend out money to businesses and households. Europe’s woes contrasted with much stronger growth in the US, which is expected to outpace Europe for the next two years. Japan is expected to see growth of 1.6 per cent this year thanks to prime minister Shinzo Abe’s “shock and awe” plans to lift the economy, although the OECD warned it would need a “delicate balancing act” to boost growth in a more sustainable way.