Infrastructure spending 'key to UK revival'
Targeted investment best way to kickstart recovery, says OECD
The Government needs to increase spending on infrastructure to boost lacklustre growth in the UK, according to a leading think tank.
Growth is expected to pick up "gradually" this year and next, the Organisation for Economic Co-operation and Development (OECD) said , while the economy faces "strong headwinds".
The OECD said more spending cuts are vital to stabilise public finances, but it added: "Continuing to shift the composition of public expenditure in favour of infrastructure investment would enhance growth prospects."
The group lowered forecasts for the UK's growth prospects this year and next as it said the muted global recovery and tattered public and private sector balance sheets "continue to weigh on growth".
It expects the UK economy to grow by 0.8% this year and 1.5% in 2014, down from its November forecast of 0.9% growth this year and 1.6% growth next year.
The OECD said the eurozone, Britain's biggest trading partner, will shrink by 0.6% this year – far worse than its previous prediction of a 0.1% contraction.
It said: "Continuing weakness of euro area trading partners, slow real income growth and necessary public and private sector deleveraging are generating strong headwinds for the (UK) economy." The think tank sees the eurozone growing by 1.1% next year, lower than its previous expectation of 1.3% expansion.
UK unemployment is expected to remain broadly flat at around 8%, it added, as the flexible labour market and low wage rises limit job losses.
But the OECD singled out high youth unemployment as a key concern.
Chris Leslie, shadow financial secretary to the Treasury, said the Government needed to "kickstart the economy".
He said: "The OECD has once again cut its growth forecasts for the UK economy, warning that youth unemployment is too high and that weak growth means wages are not keeping up with price rises."
But the OECD said that while new Government housing measures are likely to encourage residential investment and supply, there could be "upward pressure on house prices" if builders do not hike output of new homes.
The Government's new Help to Buy scheme lends buyers up to 20% of the value of a new-build home, interest-free for five years.
Mortgage guarantees also aim to support another £130bn of high loan-to-value mortgages, by shifting the risk of default away from lenders on to the state.
With the deficit forecast to remain stubbornly high this year, the OECD added that "further fiscal consolidation is necessary to restore the sustainability of public finances".
In its half-yearly forecast, the Paris-based OECD also cut the world's growth forecast to 3.1% this year, from 3.4%. Next year it sees the global economy expanding by 4%, compared with its previous forecast of 4.2%.
Predicted growth in economy this year – 1.5% in 2014
The eurozone is expected to contract by this much this year
The unemployment rate is set to remain broadly flat next year