The Organisation for Economic Co-Operation and Development (OECD) said on Monday that Britain will slip into a modest recession early next year.
The announcement came as the organisation slashed its growth forecast for the UK.
The OECD statement also called for the Bank of England to expand its asset purchasing programme, called quantitative easing (QE). QE is designed to inject cash into the economy by purchasing UK government bonds, called gilts.
However, this process pushes up the price of gilts, meaning that their interest rate is pushed down.
Organisations such as Save Our Savers and Age UK have said that by artificially suppressing the interest on UK government debt, savers and particularly pensioners are left with little recourse as they see their life savings depleted. This is because the yields on government gilts are used to calculate many things that affect savers, such the amount of money pensioners can withdraw from their life savings.
The OECD has also called for Britain to relax its austerity drive if economic conditions get worse than already predicted, a recommendation that the International Monetary Fund has also made to no avail.
As it is, the Paris-based agency has cut its growth prospects for Britain, predicting that it will see output fall by 0.1% in the fourth quarter and 0.6% in the first three months of next year. Economists define a recession as 2 consecutive quarters of retraction.
The OECD expects even weaker growth than forecasted unless the Bank of England expands its 275 billion pound asset purchasing programme to 400 billion by the beginning of 2012. This number is far higher than most economists have estimated until now.
The Bank of England is also expected to cuts its UK economic growth forecasts for Tuesday, which means Chancellor George Osborne will have a difficult climate in which to deliver his autumn fiscal address.
Though the huge 400 billion pound asset purchasing programme recommended by the OECD means that the Bank would own almost 40% of the UK government’s debt, the agency says it is absolutely necessary to pour more support in the economy.
The agency has also declared that Britain, already one year into its austerity drive of spending cuts and tax raises to reduce the budget deficit, should continue with its fiscal plans. They have helped maintain low yields on government bonds and bolstered credibility, the OECD says.