UK economy shrinks by less than expected in 2012

Nov 28, 2012

OECD says British output will increase by 0.9 per cent in 2013, but unemployment will also rise

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THE UK economy has contracted by less than feared over 2012. However, unemployment will rise in 2013 despite predicted growth of 0.9 per cent.
The slightly less gloomy picture of the British economy has been painted by the Organisation for Economic Cooperation and Development (OECD), the Paris-based economic think tank, in its half yearly forecast, reports The Guardian.

UK national output is expected to shrink by 0.1 per cent this year – but this is better than the 0.7 per cent contraction the OECD was predicting in August.

The OECD said: "Growth is projected to recover gradually and gain momentum towards the end of 2013, as exports and household spending pick up as confidence recovers.

"Although employment grew strongly in 2012, unemployment is expected to rise slightly in 2013, as the subdued recovery and continued uncertainty may make firms hesitant to hire."

The global slowdown, the Eurozone crisis, budget spending cuts and efforts to cut consumer debt will all act as a brake to economic recovery over the coming year. Unemployment is expected to climb next year to 8.2 per cent. By 2014, the pace of growth will pick up 1.6 per cent.

The OECD appeared to give the go-ahead to Chancellor George Osborne to let slip his target of eliminating the UK’s structural deficit by 2015. "With the fiscal deficit and public debt still high, the policy of fiscal consolidation remains appropriate to ensure the sustainability of the public finances", said the think tank.

"In the event of lower than expected growth, the flexibility of the fiscal mandate should be utilised to allow the automatic stabilisers to continue to operate, even though this may imply pushing out the debt target."

Elsewhere across the developed world, the OECD paints a picture of lower-than-expected growth. The increase in output in the US will fall from 2.2 per cent in 2012 to 2 per cent in 2013. In Japan, expansion will drop from 1.6 per cent to 0.7 per cent. In the eurozone, growth will be negative for the second year running: -0.4% in 2012 and -0.1% in 2013.

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Public sector jobs are counted in GDP at cost, regardless of the usefulness of the output. Eliminating any non-productive will have no effect on real output but will lower the reported value of GDP. Even if the displaced employees are transferred to productive work in the private sector, GDP might fall as real output rose, such is the perversity of National Income Accounting.