Britain should seek to maintain close economic ties with the European Union to weather the impact of Brexit, the OECD said on Tuesday. The Organization for Economic Co-operation and Development left its growth forecasts for Britain unchanged from its previous prediction of 1.6 percent in 2017 and one percent in 2018.
But Britain’s planned departure from the EU has worsened the country’s existing productivity problem by increasing uncertainty and reducing business investment, said the Paris-based OECD, which advises industrial nations on economic policy.
Reviving the growth of labour productivity is a challenge “compounded by Brexit”, it said, and exiting the EU could reduce total factor productivity by about three percent after 10 years due to reduced trade. The organisation also warned that a “disorderly Brexit”, one in which no trading relationship is arranged, would constitute a medium-term shock to Britain’s economic growth prospects.
“Business investment would seize up, and heightened price pressures would choke off private consumption,” the organisation said in a report. “Negotiating the closest possible EU-UK economic relationship would limit the cost of exit.”
Britain voted to leave the EU in a June 2016 referendum. It is due to exit the bloc in March 2019. A decision to stop Brexit would have a positive impact on the British economy, the OECD claimed. “In case Brexit gets reversed by political decision (change of majority, new referendum, etc), the positive impact on growth would be significant,” the report said.
Ahead of British finance minister Philip Hammond’s annual budget on November 22, the OECD also said that the Treasury has a buffer of 1.25 percent of gross domestic product relative to its structural deficit target of two percent of GDP. It recommended investment targeted at increasing productivity, such as “spending on repair and maintenance or soft investment” if growth weakens further ahead of Brexit.
Hammond highlighted the issue before the Treasury parliamentary scrutiny committee on Wednesday, saying: “we do have a fundamental underlying problem about productivity growth in the UK economy”.
“The UK distinctive issue is regional disparity,” he added.