After a strong post-pandemic recovery, the UK economy is facing slower growth with rising inflation and labour shortages exacerbated by Russia’s war of aggression against Ukraine.
Economic policy should focus on addressing long-standing structural challenges such as low productivity growth, high inequalities of opportunity and on achieving carbon neutrality, according to a new OECD report.
The latest OECD Economic Survey of the United Kingdom highlights the importance of balancing gradual fiscal adjustment with support for growth and investment. While taking steps to lower the public deficit and debt, it is also important to ensure temporary support through targeted income transfers to help low-income households shoulder the rising cost of living.
Higher business and public investment, improved skills across the workforce and measures to facilitate greater labour mobility and increased female workforce participation are required to revive productivity growth.
“Like other economies around the world, the UK economy faces a number of headwinds, with pre-existing structural challenges magnified by the pandemic and Russia’s war of aggression against Ukraine,” OECD Secretary-General Mathias Cormann said.
“The key to stronger economic growth and better opportunities will be stronger growth in productivity. That is why we welcome the government’s plans for large-scale investment in infrastructure, skills and innovation.”
The UK economy recovered to pre-pandemic levels by the end of 2021. However, this rebound was accompanied by supply and labour shortages in the wake of rising global demand and higher shipping costs. With inflationary pressures from significantly higher energy prices intensifying since Russia’s war of aggression against Ukraine, monetary policy should continue to be progressively tightened to ensure the return of inflation to target.
The combination of high-energy prices, increasing global prices of tradable goods and services and heightened uncertainty is dampening the economic outlook.
Population ageing will require greater labour resource utilisation to support economic growth and public finance sustainability. Significant public and private investment will be needed, in line with the government’s “Levelling Up” agenda, to address regional disparities in living standards, including work opportunities, education and health.
To accelerate the digital and green transitions, public investment – expected to remain close to 2.5% of GDP over the coming years under the UK’s “Plan for Growth” – will need to be complemented by significantly higher private investment. This calls for a policy environment that ensures stability and provides a transparent longer-term strategy.
The United Kingdom is committed to achieving net-zero greenhouse gas emissions by 2050, an ambition that benefits from broad political support, a strong institutional framework and pioneering work to embed climate considerations in the financial sector.
The UK has successfully reduced greenhouse gas emissions in the past and outperformed recent targets, but maintaining this pace of progress towards net zero will require substantial investment as well as the expansion of pricing instruments across the economy and well-designed sectoral regulation and subsidies. Uncertainty regarding future policy stringency holds back investments and securing a predictable policy path would better support the green transition.