The Paris-based Organisation for Economic Co-operation and Development (OECD) said the outlook for the UK had deteriorated and predicted the economy will shrink by 0.7% this year, compared with previous forecasts of a 0.5% decline. The only G7 member worse off than Britain is Italy, which is expected to shrink by 2.4%. By contrast, Germany is expected to grow by 0.8%.
Rachel Reeves, Labour's shadow chief secretary to the treasury, said: "These very concerning forecasts show just how badly the government's economic policies have failed. Britain's growth forecasts have been slashed by more than any other major economy. And while ministers desperately try to blame all our problems on the eurozone crisis, the OECD says France and Germany are doing better than us. In fact Britain is one of just two G20 countries in a double-dip recession."
The US economy, meanwhile, is expected to grow, helped by improvements in the housing market and some progress on tackling its debt. Still, the OECD cut its growth forecast from 2.4% to 2.3%.
Only Japan is thought to be improving, with growth predicted to reach 2.2% (compared with previous expectations of 2%) as it rebuilds its economy following the earthquake and tsunami in 2011.
The thinktank blamed the weakening economic outlook squarely on the crisis in the eurozone, which has hit trade and business confidence around the world. The OECD also warned against too much austerity, which it said was "acting as a drag".
It expects the slowdown in the leading industrial countries to continue to the end of the year and warned that any intensification of the eurozone crisis, a rising oil price, or slowdown in the US "could derail an already weak recovery".
Chris Williamson, chief economist at Markit, said: "The downgrade to the outlook is not surprising, given the deterioration in the eurozone crisis and the extent to which we have seen business confidence hit as a result. Unless the eurozone crisis is resolved soon, even these downgraded forecasts could prove overly optimistic."
The OECD welcomedThursday's moves by the European Central Bank to intervene in the debt markets and help bring down the borrowing costs of crisis-hit eurozone countries. But it urged central banks across the globe to do more to boost growth – cutting interest rates to zero and doing more electronic money creation.
However, this advice was ignored by the Bank of England, which on Thursday kept rates on hold and made no change to its £375bn quantitative easing programme.
The ECB also ignored OECD calls for it to cut its marginal lending facility – effectively the rate at which commercial banks borrow overnight – and kept all interest rates on hold.
In relation to the US, the OECD said the so-called "fiscal cliff" – when Bush-era tax breaks will be dropped and a series of draconian spending cuts imposed at the end of this year – would probably push the US economy into recession.
It said: "It is urgent that the political parties agree on detailed medium-term consolidation plans that will avoid this outcome and reduce uncertainty regarding the fiscal outlook."
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