UK's growth potential has risen, says OECD

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The Independent Online
THE BRITISH economy's growth potential has increased, but Gordon Brown, the Chancellor, is right to insist he has no Budget war-chest, according to a glowing end-of-year report from the influential Organisation for Economic Co-operation and Development yesterday.

The Paris-based think-tank also praised the Bank of England's monetary policy for being "resolutely forward looking", saying that although interest rates might have to rise again, it would not be as far as in the past.

In a thoroughly upbeat report, the OECD has substantially revised up its forecasts for growth this year and next in most member countries, including the UK.

It no longer expects the United States to slow down as much next year, predicts Japan's GDP will expand rather than fall and has also pencilled in higher growth in the Euro area.

In addition, the Asian recovery has been stronger than expected, although the best the report can say about Brazil and Russia is that growth has been "less bad than feared".

The transformation in economic prospects for the industrialised economies over the past year has been remarkable. Yesterday's report predicts a benign two years of low inflation, growth close to trend and falling unemployment ahead for member countries.

Prospects for the US pose the biggest risks to the rest of the world as both the huge balance of payments shortfall and the high level of the stock market mean there is a risk of a hard landing.

The organisation's economists advise the US Federal Reserve of the need for further "significant" increases in interest rates in steps over the next year.

They predict growth of 3.8 per cent this year, 3.1 per cent next year and a slower 2.3 per cent in 2001, alongside inflation picking up to 2.3 per cent by the same time.

It forsees UK interest rates rising to a peak below 6.5 per cent next year. Estimated growth is 1.7 per cent this year, up from 0.7 per cent, 2.7 per cent next year, and 2.3 per cent in 2001.

Higher growth has boosted tax revenues, but the report says the Chancellor was right to keep fiscal policy "broadly neutral". "The fiscal bonus should not be spent, all the more so as the original expenditure plans already included a boost for several programmes."

The OECD does not forecast the Government's target measure of inflation but puts the GDP deflator, a broader inflation indicator, at 2.6 per cent over the next two years, climbing from 2 per cent this year. It adds that the "enhanced credibility" of monetary policy means the interest rate cycle will be less pronounced than in the past.

The revisions to EU growth are less dramatic, but the tone of the report is more optimistic. In particular, it predicts a "sharp decline" in unemployment on the Continent thanks to low wage growth and jobs market reforms.

The European Central Bank will not need to raise interest rates again until the end of next year, the report says.