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OECD reduces UK growth forecast ... again

An influential think-tank has cut its UK growth forecast 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 rise 1.4%, 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 to stave off high inflation, it added.

OECD reduces UK growth forecast ... again

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. Official figures from the Office of National Statistics yesterday showed that GDP grew by 0.5% in the first quarter of 2011, which left its previous estimate of economic growth unchanged.

This means growth in the first quarter cancelled out a 0.5% decline in GDP in the final quarter of 2010, which was disrupted by heavy snowfall.

The figures revealed that household spending declined by 0.6% in real terms, its biggest drop since the second quarter of 2009, after consumers were squeezed by the failure of wages to keep pace with inflation. This follows a drop of 0.3% in the final quarter of 2010.

Business investment also declined 7.1% quarter-on-quarter in its biggest fall for two years.

The ONS also said the UK’s net trade deficit had decreased to £5.7bn in the quarter, from £11.5bn the previous year, as exports had risen and imports dropped.

This was the biggest upwards contribution to growth from net trade since records began in 1955.

The OECD report also said 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.

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