Britain will have one of the highest inflation rates in the G20 this year but should narrowly avoid recession, the Organisation for Economic Co-operation and Development (OECD) has said in its latest set of forecasts.

The Paris-based OECD – a club of rich countries – said UK inflation will be higher in 2023 than nearly any G20 member save for Argentina and Turkey.

However, looking at its broader membership, the UK’s inflation rate, while high, will be outpaced by a number of other countries, including Sweden and Iceland.
It warned that higher interest rates are likely to dampen economic growth and incomes in the coming months.

It comes after the chancellor told Sky News he would back the Bank of England to raise interest rates in the coming months to bring inflation under control, even if it pushed the UK into recession.

Like the International Monetary Fund late last month, the OECD has upgraded its forecast for UK economic growth this year and next, so it is no longer the slowest-growing nation in the group of seven leading industrialised economies.

The UK will grow by 0.3% this year and 1% in 2024, the OECD’s Economic Outlook predicted.

“The high interest burden on public debt and the recent drop in average debt maturity leave the public finances exposed to movements in bond yields,” it said – a sign that it remains concerned about the state of the public finances.

“Renewed increases in wholesale energy prices due to Russia’s war of aggression against Ukraine would further squeeze real incomes given the United Kingdom’s high dependence on natural gas. Faster-than-expected resolution of uncertainty regarding future trade relationships is an upside risk.”

The OECD said the UK’s inflation rate should average 6.9 per cent this year, somewhat higher than the OECD average.

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Britain’s high inflation is a result of a lack of participation in the labour market, energy prices, and wider supply chain disruptions, OECD Chief Economist Clare Lombardelli told Sky.

It pointed out that there were some worrying signs about the rate of inflation in the UK, compared with other countries.

The share of items in the consumer price index “basket” rising by more than 5 per cent a year is now up to more than a third in the UK, compared with under 30 per cent in the euro area, Japan, Canada and the US.

The OECD’s new chief economist Clare Lombardelli, who recently joined from the UK Treasury, said that global growth would be a little bit stronger this year than expected, but at 2.7%, it remained below what might be considered a healthy rate.

“The global economy is turning a corner but faces a long road ahead to attain strong and sustainable growth,” she said.

“Monetary policymakers need to navigate a difficult road. Although headline inflation is declining thanks to lower energy prices, core inflation remains stubbornly high, more so than previously expected… Some economies grappling with stubbornly high core inflation may require additional interest rate increases.”

Responding to the announcement Chancellor Jeremy Hunt, said: “Today’s report boosts our growth forecast, praises our action to help parents back to work with a major expansion of free childcare, and recognises our cuts to business taxes which aim to drive investment.

“But while inflation is still too high, we must stick relentlessly to our plan to halve it this year. That is the only long term way to grow the economy and ease the cost of living pressures on families.”