An influential thinktank cut its UK growth forecast today for the second time this year and said interest rates will need to increase in coming months.
The Organisation for Economic Co-operation and Development (OECD) predicts GDP will grow at 1.4% in 2011, downgraded from the 1.5% it forecast in March and the 1.7% it had previously estimated.
It now says the UK economy will grow by 1.8% next year, instead of 2%.
Interest rates, at a record low of 0.5% for more than two years, will need to start rising in 2011 to stave off high inflation, it added.
The latest OECD forecasts are significantly lower than those of government financial watchdog the Office for Budget Responsibility which predicts growth of 1.7% this year and 2.5% for 2012.
According to the OECD, UK growth will remain weak throughout 2011 despite rising exports and business investment, as household spending is squeezed by higher prices and rising unemployment.
Inflation, currently at 4.5%, will remain above the Bank of England’s 2% target this year and for most of 2012 but will fall when the impact of tax rises and higher import prices wane, it added.
It said the government’s austerity measures are “needed” but suggested that further measures aimed at increasing both public sector efficiency and the retirement age would help ease some of the UK’s fiscal pressures.
The OECD insisted the global recovery is growing in strength, led by the so-called emerging economies. But higher commodities and rising inflation raised the spectre of stagflation, high inflation coupled with stagnant growth, which means the global economic crisis may not be over yet.
It called on governments around the world to do more to tackle high unemployment, trade imbalances and inflationary pressures.