The Organisation for Economic Co-operation and Development (OECD) has forecast that the British economy will grow by a pitiful 1% next year partly thanks to the uncertainty around Brexit.
It warned that if the UK leaves without a deal it would trigger an ‘adverse reaction’ in the financial markets and push exchange rates to new lows.
The OECD report says: “In case Brexit gets reversed by political decision (change of majority, new referendum, etc.), the positive impact on growth would be significant.”
Discussing the risk of leaving the EU without a deal, the report says: “A break-up of EU-UK negotiations, cancelling out the prospect of a trading relationship in the foreseeable future, would trigger an adverse reaction of financial markets, pushing the exchange rate to new lows and leading to sovereign rating downgrades.
“Business investment would seize up, and heightened price pressures would choke off private consumption. The current account deficit could be harder to finance, although its size would likely be reduced.”
It admitted that negotiation outcomes are difficult to forecast, and that it there is a chance it could ‘prove more favourable’ than assumed in its report – boosting trade, investment and growth – but it stressed this would only be possible if there was ‘an ambitious EU-UK agreement and a transition period to allow for adjustment to the new agreement’.
“Meantime, however, uncertainty could hamper domestic and foreign investment more than projected and hurt consumption even more were the exchange rate to depreciate further,” it added.
The report also highlighted how labour productivity was weakest outside of Greater London and the South East of England, and that this was a possible leading cause of the referendum result.
“Well-being inequalities may have been one of the causes of Brexit, as less-educated workers in remote regions might have perceived to benefit less from the European project,” it said.
In another recommendation, the report controversially suggests that the UK Government should be prepared to build on the Green Belt.
It reads: “A careful reassessment of the overall economic costs and environmental benefits of maintaining the Green Belt is needed, including alternative ways to preserve or create green space, more integrated in the cities (parks) rather than around them.”
Responding to the OECD report, a spokesman for the Treasury said: “Increasing productivity is a key priority for this Government, so that we can build on our record employment levels and improve people’s quality of life.
“Today, the OECD has recognised the importance of our £23 billion National Productivity Investment Fund which will improve our country’s infrastructure, increase research and development and build more houses.
“In addition, our reforms to technical education and our ambitious Industrial Strategy will also help to deliver an economy that works for everyone.”
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