OECD economists warn: Pressure on real wages in the UK will continue until Christmas

Pressure on real wages in the UK is expected to continue at least until Christmas as inflation remains the highest among major economies, leading economists warned on Wednesday.

The Organisation for Economic Co-operation and Development forecast an inflation rate of 6.9 percent for the UK in 2023. This would be higher than the inflation rate in Germany (6.3 percent), in France (6.1 percent) and also higher than the OECD average of 6.6 percent.

It was also stressed that salaries would “stagnate” in 2023, taking inflation into account, before rising again the following year as price increases slow.

The Paris-based think tank also warned that the freeze on income tax rates implemented by Finance Minister Jeremy Hunt would “significantly increase the tax pressure on households”.

In addition, banks were accused of raising mortgage interest rates faster than savings rates.

Some reasonably good news for the finance minister: he has raised his economic forecast for Great Britain from March, although the growth rate remains modest.

GDP growth is now forecast to be 0.3 percent in 2023 and one percent the following year. In March, the forecast had assumed a decline of 0.2 percent this year and subsequent growth of 0.9 percent in 2024.

But all other economies in the G7 group of wealthy countries except Germany – the US, Canada, France, Italy and Japan – are expected to grow more strongly this year, showing that Britain is lagging behind on the international stage.

The OECD also warned that the government remains “significantly dependent on interest rate fluctuations” given the “restrictive fiscal policy” needed to reduce high inflation and public debt levels.

It should therefore “quickly” push ahead with the steps announced in the spring budget to get more people – including parents of young children, welfare recipients and those over 50 – back into work through a range of measures, including better childcare.

The OECD's June report came after figures showed that inflation in the UK fell from 10.1 percent in March, but only fell to 8.7 percent in April.

However, with inflation having outpaced most wage increases in recent months, it said: “Real wages will stagnate in 2023 as a gradual easing in labour market conditions limits nominal wage growth, before eventually rising in 2024 thanks to lower inflation.”

“Unemployment will rise steadily to around 4.5 percent as growth remains subdued.”

Hunt said: “Today's report strengthens our growth forecast, praises our action to get parents back into work through a massive expansion of free childcare and recognises our corporate tax cuts aimed at boosting investment.”

But Sarah Olney, Liberal Democrat Treasury spokeswoman, said: “This is a damning verdict on the government's economic record.”