Britain is highly vulnerable to the credit crisis, and house prices will continue to fall, possibly by 10 per cent;
Some 200,000 more people will lose their jobs over the next 18 months as unemployment rises to 5.8 per cent — the highest level in a decade;
The economic growth rate will slump to 1.4 per cent next year, the lowest since 1992, and far below the Treasury’s 2.5 per cent forecast.
To combat the decline, the OECD said the Bank of England needed to cut interest rates three times, bringing them down to 4.25 per cent — the lowest in more than four years.
However, it advised the Bank’s Monetary Policy Committee (MPC), which takes its latest interest rate decision today, to wait until next year before a reduction, or risk losing control of inflation.
The OECD has warned repeatedly that by spending and borrowing so freely since the turn of the millennium the Government would leave Britain ill-equipped to deal with an economic slump. It said yesterday that this had come to pass.
Forecasting that unless the Government raises taxes or cuts spending it will break its borrowing rule, it said: “Much tighter fiscal policy [higher taxes or lower public spending] will be required in the future if the rule is still to be respected.
“While ongoing economic weakness in 2009 would argue against fiscal restraint, the Government’s options have been limited by excessively loose fiscal policy in past years when economic growth was strong.”
The comments are embarrassing for Mr Brown, whose stewardship of the economy both as Chancellor and Prime Minister has come under fire as the housing market has turned and the broader economy has slowed.
In the latest sign of the slowdown, statistics showed yesterday that the services sector – which includes everything from banks to hairdressers and accounts for three quarters of the economy – had started to shrink for the first time in five years.
The survey, by the National Institute for Purchasing and Supply, showed that companies’ optimism about future employment fell to the lowest level on record.
The Home Builders Federation reported that activity in the housing market had also slumped to a new low. And the Council of Mortgage Lenders emphasised that it expects home repossessions to increase sharply this year.
The bad news helped push the FTSE 100 shares index below 6,000 for the first time since April. It fell 87.6 points to 5,970.1.
Whereas the United States has produced significant tax cuts to help home owners through economic troubles, the OECD said Mr Brown had little or nothing left to offer.
Not only did it reduce its forecast for growth this year — last made only six months ago — from 2 per cent to 1.8 per cent, it slashed its projection for next year’s growth from 2.4 per cent to 1.4 per cent. This is among the most downbeat predictions from any major economic institution.
The slowdown may even last longer than previously expected. Jorgen Elmeskov, the OECD’s acting chief economist, said: “The UK will only have a fairly gradual recovery. This is due to the strength of the headwinds facing the UK, not least the housing prices, but also the fact that the UK is more sensitive to developments in the financial sector.”
Michael Saunders, the chief UK economist at Citigroup, said: “If anything, I think it could be even worse. Will it be worse than the 1990s? You could argue both ways — but either way it will be grim. He [Mr Brown] should have been more prudent in the good times, and that’s why he’s where he is now.”
The report said the MPC could afford to cut borrowing costs by three-quarters of a percentage point next year. This would reduce the monthly bill of a household with a £150,000 interest-only mortgage by £94, if the full cut were passed on by lenders.
However, it said the MPC, which is widely expected to leave rates on hold at 5 per cent today, should wait some time since energy and food prices threaten to raise inflation. British Retail Consortium figures showed the cost of food had jumped by 5 per cent in May alone.
Last month, Mervyn King, the Bank of England governor, said inflation may rise towards 4 per cent over the next 12 months.
The OECD report said: “Growth could slow more markedly if financial sector health continues to deteriorate or if the housing market falls into a more significant slump, while high inflation expectations pose upside risks to inflation.”
Philip Hammond, the shadow chief secretary to the Treasury, said: “This worrying report confirms what the Conservative Party has been saying all along — Gordon Brown failed to fix the roof when the sun was shining.
“He borrowed in a boom, leaving us with the largest budget deficit of any industrial economy. Now we are all paying the price.”
The Treasury said it did not agree with the OECD’s forecasts. “The UK economy remains strong, and is well placed to get through these global problems.”