PRODUCT PROFILE

Latest Dublin Prices

OECD backs UK austerity and easing

Tuesday, May 22 09:40:41

Britain's government has no room to ease up on austerity to boost growth despite a number of risks ahead, the OECD said in its latest Economic Outlook report published today. The UK economy still looks set to recover this year from the recession it slipped into at the end of 2011, the Organisation for Economic Co-operation and Development said. It kept its growth forecast unchanged at 0.5 percent for 2012 while raising its 2013 prediction a notch to 1.9 percent.

"Fiscal consolidation is a drag on growth," the OECD said. "However ... fiscal policy remains heavily constrained. The ambitious government plan to restore fiscal sustainability remains on track and appropriate despite disappointing economic growth." The government has come under renewed pressure to soften its austerity drive, aimed at erasing a huge budget deficit over the next five years, after the economy fell into its second recession since the financial crisis.

"Growth will remain weak in the first half of 2012, but should gain momentum thereafter, with private consumption supported by higher real incomes, as inflation slows and exports and business investment revive with stronger external demand," the OECD said. However, the think tank warned that the economy faced a number of risks. A weaker global economy could hit exports, while global financial turmoil might tighten financial conditions, and higher oil prices would hurt consumption.

The OECD took a more neutral line on the Bank of England's policy than in its November outlook, when it called for more quantitative easing and pencilled in an eventual total of 400 billion pounds of such asset purchases. "With the policy rate at 0.5 percent and quantitative easing at 325 billion pounds since February 2012, monetary policy is appropriately providing strong support to the economy," it said in the May report.

The BoE policymakers voted to stop the asset purchases at 325 billion pounds in May due to concerns over stubbornly high inflation, though governor Mervyn King left the door open for more easing as the euro zone crisis continues to rage. The OECD raised its inflation forecast for Britain, seeing a rate of 2.6 percent in 2012 and 1.9 percent in 2013, just below the Bank of England's 2 percent target. ( C) Reuters