OECD call for increased public investment as UK economy weakens and real wage decline intensifies
Today the OECD issue their twice yearly Economic Outlook, setting out their view of how the economy will develop, and how governments should respond. Their message for the UK government is clear: they need to invest.
The headline on their economic commentary remains the weakening of GDP growth to 1.6% in 2017 and then to 1% in 2018 , “owing to uncertainty about the outcome of the Brexit negotiations”. These figures are unchanged from their March interim outlook, but a way below the latest OBR forecasts for 2.0% in 2017 and 1.6% in 2018. They also forecast a rise of unemployment to 5.3% in 2018; the OBR forecast 5.1%.
As widely understood, the OECD point out how household consumption has been the main driver of growth to date. But this has been sustained by “reducing gross savings and borrowing” (as on the chart below).
So this is forecast to weaken, and they observe retail sales have “been volatile more recently and banks expect to tighten the availability of consumer credit.” They note too the regulatory authorities’ worries about the quality of lending standards. [On very techie territory, they appear to suggest that the Term Funding Scheme announced alongside the Governor’s stimulus package after the referendum is partly behind the strength of consumer credit.]
Of private activity they note:
- “higher uncertainty is undermining business investment”, with a decline of 1.8% forecast in 2018; and
- “Despite the depreciation of the exchange rate, exports have been volatile and export market shares have not risen”, but the forecast slows a modest acceleration in growth (on the basis of ‘most favoured nation’ treatment after Brexit).
On the labour market: “Vibrant employment growth has slowed somewhat” and “Nominal wage growth has been easing”. In fact employment growth may have picked up a little since the report was drafted. But the comment on wages is relatively gentle given their dire forecast. In their last forecast the showed real wages falling by 0.4% into 2018; their latest forecast shows a decline of 1.2%.
Ultimately the OECD show the way to protecting working people from this increasingly challenging outlook. They observe that on the basis of present plans: “fiscal consolidation is planned for 2018 despite a weaker growth outlook”. And they call instead for
… further fiscal initiatives to increase public investment should be considered to support demand in the near term and boost supply in the longer term.
As the TUC has been arguing (eg), investment in infrastructure and in the regions that need it most, would both provide a boost to demand now, and strengthen the economy for the long term:
Dealing with these downsides requires stronger policies to ease adjustment. Higher investment in transport infrastructure, in particular in less productive regions, would improve connectivity and the diffusion of knowledge. Higher housing supply would improve the matching of skills to jobs in the labour market and ease the reallocation of resources towards sectors with stronger comparative advantage. Supporting higher educational attainment and addressing teacher shortages in less productive regions would raise skill levels of younger people, increasing their adaptability and their chances of finding and holding good jobs.