Britain should brace for higher unemployment as economic growth weakens due to Brexit uncertainty, falling consumer confidence and a collapse in investment, an influential think tank has warned.
As part of its latest economic outlook, the Organisation for Economic Co-operation and Development (OECD) said UK growth is set to fall further over the next two years to 1.2% and 1.1%, after easing to 1.5% for 2017.
It could ultimately hit the UK’s jobless rate which currently sits at a record low of 4.3%.
“Economic activity is set to grow at just above 1% in 2018-19, with the negative impact of uncertainty about the final outcome of Brexit negotiations being partly countered by an assumed agreement on a transition period after March 2019,” said the OECD.
“However, this pace of growth will not be sufficient to prevent a moderate rise in the unemployment rate.”
It added that “job creation is losing momentum”.
Inflation sparked by the Brexit-hit pound has weighed on household spending and is set to affect UK growth (PA)
Figures released by the Office for National Statistics (ONS) earlier this month showed that the number of people in work has fallen by 14,000, the biggest reduction in two years.
Employment was just over 32 million in the quarter to September after the largest three-monthly fall since April-June 2015.
Other figures showed that the number of people classed as economically inactive increased by 117,000 to 8.8 million, the biggest rise in more than seven years.
The OECD’s GDP growth forecasts undershoot those issued by the UK’s Office for Budget Responsibility, which currently expects GDP growth of 1.4% in 2018 and 1.3% in 2019, giving a gloomier outlook for the British economy.
The think tank said the current drop in household spending is likely to continue as the effects of the Brexit-hit pound trickle through to consumer prices, though Britons will dip into potential savings in an attempt to keep up spending habits.
It also warned over the high level of growth in consumer debt, saying that it posed a “major financial stability risk”, particularly in light of stagnant wages which continue to be outstripped by the rate of inflation – a figure which has jumped to 3%.
Brexit-related uncertainty and weaker demand is also expected to weigh on business investments, as companies continue to battle higher input costs that have led to “pressures on corporate margins and private sector wages”.
The Government and Bank of England are now being urged to keep supportive policies on the table.
“Monetary and fiscal policies need to remain accommodative,” the OECD said.
The Bank of England raised interest rates for the first time in a decade this month, from 0.25% to 0.5%, in an attempt to bring inflation back to its 2% target, but the OECD said the Bank should wait for signs of home-grown inflationary pressures before tightening monetary policy.
“Inflation has risen to 3%, but in the absence of wage pressures the central bank should look through the temporary inflationary impact of currency depreciation.”
It also said that UK authorities “should stand ready to further increase productivity-enhancing measures to support investment if growth weakens significantly ahead of Brexit”.