Brexit to hit UK later but harder, says OECD

Posted on September 21, 2016

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Britain’s exit from the EU is likely to hit the UK economy later but harder than originally thought, the Organisation for Economic Co-operation and Development said, in new forecasts that give succour both to supporters and opponents of Brexit.

In an update on Wednesday of its main June forecasts and of its pre-referendum warning that Brexit would damage UK living standards, the Paris-based OECD acknowledged the immediate shock from the referendum had not been as serious as it had expected, but it also lowered its 2017 growth forecast more than it had predicted.

    The new forecasts bring the organisation into line with most independent economic thinking, which suggests the UK economy will avoid a recession but is slowing sharply and will perform poorly next year.

    In April, George Osborne, the former chancellor, welcomed OECD research that suggested there would be an “immediate” increase in uncertainty from a vote for Brexit, as well as lower growth. Angel Gurría, OECD secretary-general, warned that Brexit would “lead to a sell-off of assets and a sharp rise in risk premia. Consumer confidence would fall, as would business confidence and investment, thus holding back growth.”

    Three months on from the vote, the OECD’s views have changed after stronger-than-expected UK growth in the second quarter and the relatively calm financial market response to the Leave vote — apart from a sharp and sustained drop in sterling.

    For 2016, it has revised its forecast for UK growth up 0.1 percentage points to 1.8 per cent, mostly reflecting a more rapid expansion before the referendum. But for 2017, it revised its UK growth forecast down 1 percentage point — twice the downgrade that it said in June it would have to impose in the event of a Brexit vote. It now expects the UK economy to expand 1 per cent next year.

    “Developments to date are broadly consistent with the more moderate scenarios set out prior to the referendum and reflect prompt action by the Bank of England in August,” the OECD said.

    Noting its 2017 forecast was “well below” the pace of UK growth in recent years, it added, “uncertainty about the future path of policy and the reaction of the economy remains very high and risks remain to the downside”.

    Along with its change of heart on a global level to favour greater public spending on health and education to boost growth, the OECD has revised its view in support of continued UK austerity, noting that the UK has “signalled an easing in the budgetary stance” after ministers said they were no longer targeting a surplus in the public finances by 2020.

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    KNUTSFORD, UNITED KINGDOM - MARCH 17: In this photo illustration, the European Union and the Union flag sit together on bunting on March 17, 2016 in Knutsford, United Kingdom. The United Kingdom will hold a referendum on June 23, 2016 to decide whether or not to remain a member of the European Union (EU), an economic and political partnership involving 28 European countries which allows members to trade together in a single market and free movement across its borders for citizens. (Photo by illustration by Christopher Furlong/Getty Images)

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    The OECD’s current growth predictions are in line with other forecasters who have removed the expectation of an immediate recession following the EU referendum but expect a significant slowdown and lost output in 2017 directly stemming from the vote to leave the bloc.

    The Treasury’s monthly summary of independent forecasters on Wednesday showed a small upward movement in growth forecasts for 2016 from 1.6 per cent in the August survey to 1.7 per cent this month. But there was no change in the average forecast for 2017, which stayed at 0.7 per cent growth.

    The weakness expected in 2017 partly reflects expectations of persistent weakness in business investment as companies take stock and postpone capital expenditure decisions until the consequences of Brexit become clearer.

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