The Organisation for Economic Co-operation and Development (OECD) has said that it expects the UK economy to contract by 0.7% in 2012.
This is a significant decrease from the OECD’s forecast in May that the economy would grow by 0.5% this year.
In its latest Interim Economic Assessment, the organisation confirmed that the global economy has weakened since the spring, driven by developments in the euro area where key European countries are entering a recession that is having an impact worldwide. The persistent crisis in the euro area is weakening confidence, trade and employment and slowing economic growth for OECD and non-OECD countries alike.
Downgrading its growth forecasts for developed economies across the world, the OECD revealed that it expects Britain to be one of the worst hit. The economies of Germany, France and Italy are predicted to shrink by just 0.2% on an annual basis. Outside of Europe the prospects are somewhat brighter, with growth expected in the US, Canadian and Japanese economies.
The OECD called for further policy action to be taken in order to instill more confidence, for example by cutting rates and expanding stimulus programmes. It also said that the European Central Bank should lower the rates at which banks borrow from it and consider further action to help normalise monetary policy transmission in vulnerable countries.
Pier Carlo Padoan, chief economist at the OECD, stressed that resolving the euro area’s banking, fiscal and competitiveness problems is the key to recovery.