Unemployment will rise again in Britain next year as uncertainty about the global economic climate weighs on business confidence, the Organisation for Economic Co-operation & Development warned as it slashed its UK growth forecasts.
The Paris-based think-tank also urged the Chancellor to abandon his golden rule on the national debt rather than drive through more austerity measures to meet his target.
In May, the OECD had predicted growth of 0.5pc this year but it now reckons the economy will shrink by 0.1pc. In 2013, it was predicting 1.9pc growth. That’s now 0.9pc. Even in 2014, growth will be weak at just 1.6pc.
Unemployment is expected to rise from an average of 8pc this year to 8.3pc in 2013, but the squeeze on family finances for those in work is forecast to ease as wages climb by around 3pc next year and inflation stays at 2pc, the OECD predicted.
However, it cautioned that the global economy remained at risk of a “deep recession” as it cut its global growth forecasts and said the debt crisis in the recession-hit euro zone was the greatest threat to the world economy.
The think-tank forecasts the global economy will grow 2.9pc this year before expanding 3.4pc in 2013, sharply down on its May estimate of 3.4pc for this year and 4.2pc next year.
The OECD's more pessimistic outlook came as the Office for National Statistics confirmed that the UK economy grew by 1pc in the three months to September .
Some economists had expected a small downgrade to 0.9pc in the second estimate, which is compiled using more comprehensive data, but the strongest rise in household spending in more than two years underpinned Britain's dramatic rebound.
The OECD's decision to use its global economic update to deter George Osborne from trying to find more savings to protect the public finances was striking, given its previous strong endorsement for his fiscal mandate.
Although it remained squarely behind the current austerity programme, saying “the fiscal stance remains appropriate”, it came out strongly against any further measures within the current time frame drawing its policy recommendation into line with Institute for Fiscal Studies (IFS (SES: E1:I49.SI - news) ), Bank of England Governor Sir Mervyn King, the CBI, and many leading economists.
The Chancellor is expected to face an awkward choice next week when the Office for Budget Responsibility (OBR) updates its economic forecasts. Most economists believe it will judge that he’ll miss his target of getting debt as a share of GDP to fall by 2015/2016 without further savings, but they also reckon that more austerity would only slow growth further.
The OECD said: "In the event of lower than expected growth, the flexibility of the fiscal mandate should be utilised to allow the automatic stabilisers to continue to operate, even though this may imply pushing out the debt target."
Much of the UK’s economic weakness is due to the global slowdown, with “risks mainly on the downside”, the OECD said. It cited the damage to UK exports weak global growth would pose as well as the blow it would deal to domestic and business confidence, which could “lead to increased precautionary saving and lower investment”.
Higher inflation, driven by food and energy prices, would “hinder the recovery in consumption”.
Barring a deepening economic crisis, the OECD said the brightest spot in the UK economy was household consumption, which appeared to be confirmed by the ONS data. The ONS said that the Olympics and Paralympic Games helped household spending grow by 0.6pc, the strongest rate since the second quarter of 2010.
Pier-Carlo Padoan, the OECD’s chief economist, said the global economic dangers remained potent. “The risk of a new major contraction cannot be ruled out, “ he said, citing the recession in the euro area and the US.
“Lack of confidence largely reflects insufficient or ineffective policy responses, not so much by a lack of understanding of the policy requirements, but rather by failure to reach consensus on the policy response. The fiscal cliff and the debt ceiling in the US, and the management of the euro area crisis are two cases in point.”
“It is not difficult to imagine a situation in which something goes wrong, for example a programme country is unable to deliver or the new EU rescue mechanisms cannot be deployed in time with sufficient impact. Rising unemployment could trigger reform fatigue and social resistance. The euro area, which is witnessing significant fragmentation pressures, could be in danger.”
The OECD added: "If key adverse risks cannot be averted, and especially if the euro area crisis were to intensify significantly, the likely outcome would be considerably weaker, potentially plunging the global economy into deep recession and deflation, with large additional rises in unemployment."