UK: OECD predicts weak economy due to Brexit

6 years ago - Published in Finance, Fundamental Analysis

The Organisation for Economic Cooperation and Development on Tuesday issued a forecast for weak economic growth in the UK over the next two years that is worse than a much reduced estimate published last week by Britain’s fiscal watchdog. 

The club of rich nations expects Britain’s economic growth to drop sharply from a rate of 1.5 per cent in 2017 — placing the UK at the bottom of the G7 group of countries — to 1.2 per cent in 2018 and 1.1 per cent in 2019.

“The growth slowdown is expected to continue through 2018, due to continuing uncertainty over the outcome of negotiations around the decision to leave the European Union and the impact of higher inflation on household purchasing power,” said the OECD, adding that there would be a “moderate” rise in the UK’s current 4.3 per cent unemployment rate.

The OECD’s forecast for 2018 and 2019 is well below the downgraded estimate issued by the Office for Budget Responsibility alongside chancellor Philip Hammond’s Budget last week, and highlights how the organisation believes Brexit will weigh heavily on Britain’s economic performance.

 If its forecast through to 2019 is correct, said the OECD, “this pace of growth will not be sufficient to prevent a moderate rise in the unemployment rate” in the UK.

Responding to the OECD’s latest forecast, a UK Treasury spokesperson said: “There are over three million more people in work since 2010, and we are building an economy that is fit for the future. The Budget and our industrial strategy set out a balanced approach to reducing the deficit, supporting our vital public services and investing to improve our productivity.”

The OECD noted that the UK’s outlook could improve if a less disruptive Brexit materialised. The OECD has not changed its assessment that Brexit is the “major risk” to the UK economy and “maintaining the closest possible economic relationship between the United Kingdom and the European Union would further support economic growth” in future.

Brexit features heavily in the OECD’s latest economic outlook, published on Tuesday. Britain leaving the EU is described as a significant risk for economic prospects in Germany, Ireland, Latvia, the Netherlands, South Africa and Spain.

But for Luxembourg, Brexit is seen by the OECD as an opportunity. “Luxembourg’s established financial centre may become even more attractive in the wake of Brexit, especially if Luxembourg keeps its attractiveness to the associated highly qualified international labour force,” said the OECD.