UK forecast for slowest growth of richest nations next year

The UK economy will see the slowest growth of the largest developed nations next year, according to forecasts.

The Organisation for Economic Co-operation and Development (OECD) predicted that UK gross domestic product - a key measure of economic health - will rise by 1% in 2025.

This is below the rest of the G7 nations, which include Canada, France, Germany, Italy, Japan and the US.

The OECD, which is a globally recognised think tank, said the UK economy would be “sluggish” this year.

The organisation blamed the after-effects of a succession of interest rate rises in the UK for the lethargic performance.

It also warned that some elements of inflation remained high and that uncertainty over when the Bank of England might change interest rates might put people off investing.

The UK economy is now forecast to expand by 0.4% this year, a downgrade from the OECD's previous projection for 0.7% growth.

It means that for this year only Germany will see slower growth, it said.

The OECD predicted that tax receipts in the UK would "keep rising to historic highs" of about 37% of GDP".

The government has cut National Insurance twice since last year, totalling a 4% reduction. But the OECD said this "only partially offsets the ongoing fiscal drag from frozen personal income tax thresholds".

Fiscal drag means that as a person's salary rises, they can move into a higher income tax bracket.

The organisation also said that a government scheme to allow businesses to deduct the full cost of investing in machinery and equipment from their tax bill does "less than fully compensate" for an increase in corporation tax which rose from 19% to 25% this time last year.

But the OECD said that in the long-run these measures, as well as the government's free childcare scheme, "could help to lower fiscal pressure".

Chancellor Jeremy Hunt said the OECD's forecast showed the UK was "winning the war" against inflation.

"This forecast is not particularly surprising given our priority for the last year has been to tackle inflation with higher interest rates", he wrote, adding that "growth matters".

But Darren Jones, Labour's shadow chief secretary to the Treasury, said: "Today’s news that growth has been downgraded again reminds the British people what they already know: after 14 years of failure, the Conservatives cannot fix the economy because they are the reason it is broken."

Meanwhile, the Liberal Democrats accused the government of being "economically illiterate".

"Their no-growth policies have left the public enduring sky-high mortgage rates, the price of a weekly shop going through the roof, and stealth taxes hammering both pensioners and working people," said Liberal Democrat Treasury spokesperson, Sarah Olney.

The Bank of England, which is independent from the government, sets interest rates and has a target to keep inflation at or close to 2%.

Inflation - which measures the pace of price rises - has slowed significantly from a 40-year high it reached in October 2022 to 3.2% in April.

Interest rates have been held at 5.25% since last September. The OECD expects the Bank to start cutting borrowing costs from this autumn.

The think tank predicted that interest rates could fall to 3.75% by the end of next year.

The forecasts aim to give a guide to what is most likely to happen in the future, but can be incorrect and do change.

They are used by businesses to help plan investments, and by governments to guide policy decisions.