A “no-deal” Brexit would wipe around £40bn off UK economic growth by 2019, according to the Organisation for Economic Co-operation and Development (OECD).
The UK economy will grow 1.5 per cent slower in 2019 than it would inside the EU if the country crashes out of the trading bloc without a trade deal or transition deal, according to figures cited by the OECD on Tuesday.
In its latest round of forecasts, the OECD makes the assumption that trade talks will break down resulting in a hard Brexit. Under this scenario, imports and exports between the EU and UK would face tariffs under World Trade Organisation terms.
The OECD predicted 1 per cent growth for the UK in 2018 “even as other advanced economies continue to recover”.
Prime Minister Theresa May’s Government is aiming to secure a transition deal with the EU to begin in 2019, but some Tory MPs have suggested Britain should prepare for such efforts to fail.
The OECD warned that Britain’s economic prospects would be damaged by a “disorderly Brexit”, sending the pound to new lows and leading to a downgrade in the UK’s credit rating.
“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,” the report warned.
“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.
The OECD admitted that Brexit negotiations were difficult to forecast, and could “prove more favourable” than it assumed in its report – boosting trade, investment and growth – but stressed that this would require “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 OECD pointed out that productivity in the UK has been at “standstill” for a decade, and had been particularly poor outside London and the South East.
This kind of disparity between regions and workers “may lead to, or be the result of, important differences among people in terms of income and wealth, jobs and earnings, and education and skills.”
“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 added.