Caution urged over National Living Wage rise as growth slows

Updated: 

Britain should be "cautious" about raising the National Living Wage as economic growth slows, the Organisation for Economic Co-operation and Development (OECD) has warned. 

The OECD said the UK Government should "carefully assess" the impact on employment before pressing ahead with plans to raise the wage by around a fifth before the end of this parliament. 

The comments came as the Paris-based think-tank upped its forecasts for the UK economy despite warning over higher inflation and slowing investment following the Brexit vote.

It raised its projections for Britain's gross domestic product (GDP) from 1.8% to 2% for this year and from 1% to 1.2% for 2017. It expects UK growth to hit 1% in 2018.

It said the lack of clarity surrounding Britain's exit from the EU was a "major downside risk for the economy". 

"Uncertainty could hamper domestic and foreign investment more than projected and the pass-through of currency depreciation to prices could be larger, deepening the extent of stagflation."

On the National Living Wage, the OECD added: "Caution is needed with the implementation of the policy to raise the National Living Wage to 60% of median hourly earnings by 2020.

"The effects on employment need to be carefully assessed before any further increases are adopted, especially as growth slows and labour markets weaken."

In the Autumn Statement, Chancellor Philip Hammond confirmed that the National Living wage would rise from £7.20 to £7.50 an hour in April.

However, he said the real value of the wage is likely to rise by just over 20% rather than by 25% over the course of this parliament.

It came as he revealed that the UK's public finances would take a £60 billion hit as the economy slows due to the effects of Brexit.

The independent Office for Budget Responsibility (OBR) predicted that the Brexit vote would wipe 2.4% off economic growth over the next five years while average earnings will rise by less than 5% over the same period.

In its November update, the OECD said weaker growth would push up the UK's unemployment rate to above 5%, but the current account deficit would "narrow gradually" as the Brexit-hit pound boosts exports.

It said Britain was expecting to be handed the best trading terms with other countries post-2019, but there is still "considerable uncertainty about this".

Focusing on the global economy, the OECD said the world was still languishing in a "low-growth trap", but may enjoy some relief from increased spending in the United States. 

Global growth was unrevised at 2.9% for this year, but the OECD pushed up its projections for 2017 from 3.2% to 3.3%.

The organisation was sanguine about the prospects for the US economy under President-elect Donald Trump, revising up its growth forecasts for this year and next.

It now expects America's GDP to grow by 1.5% in 2016, a 0.1% rise on September's forecasts, while hiking up next year's outlook from 2.1% to 2.3%.

"The new administration will begin implementing its policy priorities next year and in this context the fiscal stance is projected to become more expansionary as public spending and investment rise, while taxes are cut," the OECD said.

"This will provide a boost to the economy, particularly in 2018."