LONDON, Nov 26 - Britain is set for accelerating growth next year but will have to continue raising interest rates to hit its inflation target and avoid problems from any further surge in house prices, the OECD said on Thursday. "The UK economy continues to exhibit greater resilience than most other OECD countries," the Organisation of Economic Cooperation and Development said in its latest economic outlook. However, it also warned the government needed to keep an eye on its growing budget deficit. The Bank of England is likely to have to raise rates again to keep the economy on track, the OECD said. It hiked rates by 25 basis points earlier this month to 3.75 percent, the first increase in nearly four years. "A gradual continuation of the recent tightening of monetary policy will be needed to ensure consistency with the inflation target and would also reduce the risk of another surge in house prices," the report said. It said British economic growth was being led by private and public consumption and had remained close to its historical potential and that inflation and unemployment were low by international standards. "The recent pick-up in activity should lead to above trend growth in 2004-05, with a more balanced expenditure composition, providing instability stemming from the housing market can be avoided."
It forecast the British economy would grow by 2.75 percent in 2004, rising to 3.0 percent in 2005. The increase in the budget deficit also presents a threat and "may call for a slowdown in spending or a rise in taxes during the current upswing to avoid a destabilising adjustment later on", it said.
GROWTH PICKED UP Q2
GDP rebounded in the second and third quarters of 2003, implying growth over the year to the third quarter of two percent, while output in the other major European economies has either fallen or stagnated, the OECD said. But real business investment remained subdued, partly because companies needed to divert funds into shoring up company pension schemes. With demand growth more robust than in much of the rest of Europe, net exports have continued to be a drag on activity. British domestic consumption is still supported by the housing market. Continued growth in private consumption has outpaced personal disposable income since early 2002. The boom in house prices has almost entirely offset the effect of the fall in equity prices on household wealth since 2000 and led to mortgage equity withdrawal running at close to a record high of six per cent of disposable income in the first half of 2003. Signs of a slowdown in the housing market at the beginning of the year appear to have been confounded, with mid-year house price inflation running at annualised rates of around 15 per cent, the OECD said.//