Britain will be back in recession this winter, warns OECD

Britain will go back into recession this winter because of a fresh increase in unemployment, a squeeze on family budgets, government spending cuts and the eurozone crisis, the west's leading thinktank has warned.

Rejecting George Osborne's argument that an expanding private sector could soak up public sector job losses, the Organisation for Economic Co-operation and Development said on Monday that dole queues would lengthen to more than 9% of the working population as growth slowed.

The Paris-based thinktank said the new setback to the economy would lead to social problems that would require targeted support for the weakest and measures to combat fast-rising homelessness.

In its half-yearly Economic Outlook, the OECD, which advises more than 30 developed countries, cut its forecast for global growth in both 2011 and 2012, predicting the eurozone would contract by 0.2% and the UK would expand by just 0.5%.

However, it said output would fall in the final quarter of this year and in the first three months of next year, sending the UK economy into recession. Pier Carlo Padoan, the organisation's chief economist, said: "The global economy has deteriorated significantly since our previous Economic Outlook. Advanced economies are slowing down and the euro area appears to be in mild recession. Concerns about sovereign debt sustainability in the European monetary union are becoming increasingly widespread.

"Recent contagion to countries thought to have relatively solid public finances could massively escalate economic disruption if not addressed. Unemployment remains very high in many OECD economies and long-term unemployment is becoming increasingly common."

The OECD study said global growth this year was now expected to be 3.4% compared with the 4.6% predicted in May, but it stressed that the outcome would be worse if the eurozone failed to tackle its sovereign debt crisis.

Mervyn King, governor of the Bank of England, raised the same concerns in evidence to the Commons Treasury select committee on Threadneedle Street's latest Inflation Report, which also sharply reduced growth forecasts for next year.

"The rise in energy and food prices, which brought about a squeeze on real take-home pay, dampened consumption more than we had expected," he said. He added that problems within the euro area raised concerns about the health of banking systems around the industrialised world. "And that's raised the cost to banks of obtaining funding and hence the cost of borrowing to companies and households. These are enormous challenges and it will not be easy to get through this, and there will I think need to be a significant amount of rationalisation of debts and credits in the world before we are finally to emerge from the end of this."

Adam Posen, a colleague of the governor's on the Bank's monetary policy committee, said he was more worried about economic stagnation than inflation or deflation, and that central bankers needed to guard against repeating the mistakes of the 1930s. "If we repeat the mistakes of the past and prematurely tighten or insufficiently loosen, whatever you do on fiscal policy, whatever you do on financial regulation, will be overwhelmed by that mistake," he said.

The gloomy predictions from the OECD came as the chancellor put the finishing touches to Tuesday's autumn statement, in which he will be forced to admit that borrowing will be higher and growth slower than he expected at the time of his March budget.

High street spending is weak in the runup to Christmas, according to the CBI, which said sales activity had dipped for a sixth successive month. The employers' organisation said retailers were shedding jobs in the worst business climate since the recession two and a half years ago.

Commenting on the UK, the OECD said the Bank would need to increase its quantitative easing programme – electronic money creation through the purchase of government gilts from commercial banks – from the current level of £275bn to £400bn next year to avoid even slower growth. It urged Osborne to stick to his tough budget strategy unless the economy performed even less well than expected. Were that to happen, the OECD said the government would be justified in softening planned public investment cuts

The OECD report said: "Retrenchment by the household and public sectors continues to be a drag on the economy. Further headwinds come from a weakening global economy, lower asset prices and rising uncertainty related to the euro area debt crisis. With household consumption falling, government spending shrinking and export growth slowing, the economy is weakening.

"Employment is falling and unemployment is already higher than during the 2008-09 recession. Government employment will continue to fall, while the business sector will further decrease hiring in response to flagging demand. The weakening of the economy is likely to have a proportionally bigger impact on employment than in the recent recession, as real wages and shorter working hours may adjust less this time."

Ed Balls, the shadow chancellor, said: "Hard-pressed families and pensioners, young people out of work and businesses on the edge will be extremely concerned by these forecasts. They suggest our economy will continue to flatline, or worse, well into next year and that unemployment will rise even higher."

World economy
Africa leads the way in growth

As the OECD mapped out a path of sluggish growth for the world's richest nations, it was easy to be feel pessimistic about the world economy. But the thinktank points to the developing nations' bigger and bigger contribution to global GDP as a source of optimism.

African nations head the list of the fastest growing economies, with Zambia out in front. Copper mining, agriculture, chemicals and textiles, have pushed the nation to 48.7% GDP  growth. Zambia is the continent's biggest copper producer and has strong links with China.

Like many African countries Zambia can claim a strong growth rate because it starts from a low base. Tackling Aids has also played a part in recovery over recent years.

Qatar ranks second, with 30% growth. Oil and gas exports have propelled it above Liechtenstein and Luxembourg to top the poll of nations with the highest per capita GDP. Jordan and Lebanon are next in the growth league, with 11% and 19% respectively.

China is the first of the large nations to gain a high ranking, at 9.1%. Next is Argentina, which famously defaulted on its debts in 2001. Rich in resources, it has benefited from the decade-long boom in commodity prices and now matches China's growth rate.

India, Egypt and Indonesia rank in the top 15 nations for 2011 in a Bloomberg ranking, but may suffer from the global slowdown more than most, and in Egypt's case following its own internal unrest.

The two fastest growing nations of the last 15 years are Equatorial Guinea and Azerbaijan, which sits on the Caspian Sea between Russia to the north and Iran to the south. Both have grown rich on oil and gas. Phillip Inman