The Organisation for European Cooperation and Development (OECD) has sharply upgraded its outlook for the UK economy in 2018.
In its latest country outlook for the UK, the intergovernmental organisation said it expects the UK economy to grow at a rate of 1.4 per cent in 2018, compared with its forecast of 1 per cent in November 2017.
The OECD said the reason for its upgrade is the much improved outlook for global growth. It expects the global economy to expand by 3.7 per cent this year, compared with 3 per cent in 2016.
But the international body urged policy makers in the UK to adopt a different course to that which has dominated economic policy for the past decade.
For the past decade policy makers in the UK have kept fiscal policy, that is, policies related to the level of government spending and taxation, relatively consistent, while monetary policy, that is, policies largely determined by the movement of interest rates and quantitative easing (QE) have been used flexibly, as tools to manage the economy.
The OECD expects inflation to remain above the Bank of England’s target of 2 per cent for the foreseeable future, justifying gradual interest rate rises to push inflation downwards.
If the economy performs either better or worse than forecast, then the government should use fiscal policy to manage the economy, with interest rates allowed to rise, the body said.
This would, in the view of the OECD, prevent inflation escalating to a point where it becomes a problem in the economy, while allowing governments the flexibility if the economic outlook changes.
The OECD said if global growth weakens the alternative way for an economy to boost growth is through enhanced productivity, and urged the government to respond to any weakness in the UK economy by boosting spending on education and training.
The UK economy grew by 0.1 per cent in the first quarter of 2018, far below the 0.4 per cent level that had been expected.
In recent evidence before the Treasury Select Committee of the UK parliament, Bank of England governor Mark Carney said most of this underperformance was the result of weather disruption in the UK earlier in the year.
David.Thorpe@ft.com
