Thursday, 30 May 2013

UK's growing economy will leave Europe behind: Austerity is 'appropriate' says OECD as eurozone stagnates

The British economy will perform better than all its major European rivals this year as the sluggish recovery picks up pace, a leading global watchdog said yesterday.

The Organisation for Economic Cooperation and Development forecast growth of 0.8 per cent in the UK in 2013 – slightly weaker than the 0.9 per cent previously expected.

But it slashed its forecast for the eurozone from a decline of 0.1 per cent to a reverse of 0.6 per cent – with Britain doing better than Germany, France, Italy and Spain.

Pier Carlo Padoan, the group’s chief economist, said: ‘The British economy is recovering slowly and that reflects the fact that Europe is doing poorly. Growth is expected to pick up gradually through 2013 and 2014.’ 

The Paris-based think tank said Chancellor George Osborne’s austerity plans were ‘appropriate’ and ‘necessary’ and added that the outlook in the UK was far brighter than on the Continent, where the situation is ‘dire’.

But, in its twice-yearly Economic Outlook report, it said ‘much more needs to be done’ to repair Britain’s battered finances and bolster growth.

The OECD called for increased spending on infrastructure projects such as housing and transport to help the UK overcome the ‘strong headwinds’ buffeting the economy.

‘Continuing to shift the composition of public expenditure in favour of infrastructure investment would enhance growth prospects,’ said the organisation, which cast doubt over the decision to protect large parts of public spending from cuts, such as the NHS, education and overseas aid.

Jorgen Elmeskov, its deputy chief economist, said: ‘We are perhaps somewhat doubtful [as] to the idea of ring-fencing certain spending areas. That tends to lead to deeper cuts in other areas which may not be warranted.

‘You may or may not want to cut down less on health than on other areas, but that should be a result of an assessment of the costs and benefits of doing it, not because you carve out health and thereby impose bigger adjustments on other expenditure items.’ 

But the report from the OECD, which represents around 30 of the world’s biggest economies, will come as a relief to Mr Osborne as the austerity debate rages on.

The International Monetary Fund last week called on the Chancellor to loosen the purse strings this year to bolster growth.

But the OECD said further cuts are ‘necessary to store the sustainability of public finances’. It warned that prolonged weakness in the eurozone ‘could evolve into stagnation with negative implications for the global economy’.

Growth forecasts in Germany were cut from 0.6 per cent to 0.4 per cent while the OECD now expects the French economy to shrink by 0.3 per cent instead of expand by 0.3 per cent.

Spain and Italy are set to fare even worse.

Jose Manuel Barroso, president of the European Commission, admitted that governments need to ‘do more to help themselves get back to growth and move Europe beyond the crisis’. He added: ‘There is no room for complacency.’ 

Mr Padoan said the pace of recovery around the world was ‘still disappointing’ but insisted that ‘the global economy is moving forward’. He called on the European Central Bank to combat the recession through measures such as a money-printing programme dubbed quantitative easing or QE.

‘Europe is in a dire situation,’ he said. ‘The eurozone could consider more aggressive options. We could call it a eurozone-style QE.’ 

The OECD said rising unemployment ‘is the most pressing challenge’ facing the region.

Construction: Chancellor George Osborne, pictured on a visit to the Port of Liverpool, is urged to invest in house building.

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