Britain will be 'last advanced economy to exit recession'

OECD report heaps embarrassment on Labour as G20 finance ministers prepare for London summit

(Getty)

Britain will emerge last from recession among the world's advanced economies, a leading international body warned yesterday.

As Gordon Brown and Alistair Darling prepare to welcome the world's finance ministers to the G20 summit in London today, the Organisation for Economic Co-operation and Development (OECD) said the UK would lag behind France, Germany, Japan and the US, among others, pouring scorn on hopes for a strong British recovery.

The OECD said that the UK would not see any growth in its economy until 2010, at least six months after most of her competitors. The OECD forecast a further shrinkage of 0.25 per cent in the UK's GDP this autumn, and stagnation for the rest of the year.

Such an outcome would have serious repercussions for unemployment and on the UK's badly stretched public finances. By contrast, the OECD said the world as whole would benefit from "mostly favourable" economic trends and would enjoy "an earlier recovery than envisaged".

The OECD forecast that the British economy would contract by 4.7 per cent over 2009, compared with its earlier forecast of a 4.3 per cent fall in output. The UK was the only major-economy country to have its forecasts for growth reduced by the economic think-tank, which was relatively upbeat about the prospects for the rest of the world. America is expected to return to growth in the third quarter of this year. Japan, however, may see a fall in output again next year.

The news comes as an embarrassment to ministers, who are trying to persuade their international counterparts who meet at the full G20 leaders summit in Pittsburgh later this month to sustain the monetary and fiscal stimulus agreed with some difficulty at previous summits. Nations returning to growth may no longer see the point of spending their way out of recessions that they are no longer in.

The UK still needs the benefits of the boost to her economy but is arguably less able to implement it, because of the parlous state of public finances and the scale of the Bank of England's £175bn "quantitative easing" programme. The Bank's scheme and the Budget deficit are the most ambitious in the world, given the size of the UK economy. Economists say neither can be sustained indefinitely.

The UK will also suffer for years from its public and private debt overhangs, the product of the largest credit binge in its history and the biggest Budget deficits in peace time. A fragile banking system will also act as a brake on growth. Last month the Office for National Statistics revealed worse-than-expected growth figures for the second quarter, which also prompted the OECD's downgrade.

While a joint letter from Mr Brown, Germany's Angela Merkel and France's Nicolas Sarkozy stressed that no- one wanted to remove the stimulus packages immediately, there remain sharp differences of view about how quickly governments and central banks should prepare to implement their so-called "exit strategies".

As more economies expand more vigorously – Australia announced an impressive bounce back earlier this week and China and India are continuing to accelerate – a slowdown in public spending and borrowing becomes more likely, as does a reduction in central bank schemes to inject money into the financial system. Paris and Berlin have made little secret of their desire to rein in such plans.

Hopes that the European economic establishment would heed British pleas suffered a further setback yesterday when the president of the European Central Bank, Jean-Claude Trichet said: "It is crucial that ambitious and realistic fiscal exit and consolidation strategies, underpinned by concrete structural measures, are put in place. The structural adjustment process should start, in any case, not later than the economic recovery and the consolidation efforts should be stepped up in 2011."

US Treasury Secretary Timothy Geithner offered limited support for Mr Darling' s pleas, saying that the talks this weekend were the start of discussions on exit strategy and that "it's too early to talk about detailed road maps for unwinding".

The OECD called for an earlier than anticipated withdrawal of official support for economies: "The possibility of a recovery taking hold a little sooner than envisaged only a few months ago diminishes the likelihood that further fiscal stimulus will be needed".

Even so, the OECD stressed that, while the recovery may have arrived sooner than expected, it will be "slow" and subject to "numerous headwinds". High unemployment and fragile house prices meant the recovery was "'likely to be modest for some time to come'".

Consensus seems to be emerging among G20 ministers on taking the task of banking regulation a step further, however, the issue of banker's pay and bonuses remains contentious.