Think-tank claims UK economy will grow fastest

The British economy will grow faster than its main European neighbours for the next two years, according to an authoritative forecast published today, writes Diane Coyle.

The Organisation for Economic Co-operation and Development has revised up its outlook for the UK in its half-year forecasts for member economies, only a few weeks after downgrading it. It predicts growth of 2.2 per cent this year and 3 per cent next.

However, a recovery in growth in the rest of Europe later this year will not be strong enough for Germany and France to qualify for the single currency on time, according to the OECD.

In contrast to the European Commission's recent optimism that the two key countries could scrape below the Maastricht Treaty ceiling for government deficits as a proportion of GDP in 1997, the Paris-based think-tank predicts that only Denmark and Ireland will qualify in time.

The OECD's pessimism about the prospects of France and Germany cutting their government budget deficits below the 3 per cent of GDP target arises from its scepticism that announced spending cuts will be implemented. In contrast, the European Commission assumed the respective governments will deliver all the spending cuts they have promised.

Restoring the health of public sector finances is the most pressing problem facing OECD countries, says the report.

Current fiscal policies are unsustainable, it argues, but the OECD is very upbeat about the short-term economic outlook. The next two years will bring sustainable growth, with a recovery on the Continent and in Japan, and low inflation.

The OECD predicts the German deficit will decline to 3.6 per cent of GDP in 1997, although it notes that this would correspond to a figure below 3 per cent, adjusting for the stage of the business cycle. It puts the French government deficit ratio at 3.7 per cent of GDP.

On the brighter side, the OECD says most member countries have come close to achieving price stability. It forecasts continued growth in the US and a firmer recovery in Japan.

The report says ``judicious'' monetary easing is required on the Continent, especially as budget cuts get under way.