The Organisation for Economic Cooperation and Development has slashed its UK growth forecast and has once again warned about the economic fallout of a vote to leave the European Union.
A vote to leave the EU, said the OECD in a report released earlier this week, would have “substantial negative consequences for the United Kingdom, the European Union and the rest of the world.”
These latest announcements come fresh off the back of claims made back in April, when OECD secretary general Angel Gurría said that a vote to leave the EU would leave households £2,200 worse off on average by 2030, a cost that he nicknamed “the Brexit tax”.
At the time, Gurría was criticised by those in the Vote Leave for his remarks which were described as biased and “implausible”.
However, the OECD has now renewed its warnings, this time with an additional focus on the global economic implications, coupled with a reduced forecast for UK GDP growth.
The OECD, in its Economic Outlook, said: “The outcome of the referendum is a major risk for the economy. A vote for Brexit would heighten uncertainty, raise the cost of finance and hamper investment.”
Back in April, the OECD was forecasting 2.1% GDP growth for the UK in 2016. In this latest report, this forecast has been downgraded to 1.75% which, if accurate, would be the lowest growth rate since 2012.
This downgrade is based primarily on the current climate, with uncertainty surrounding the referendum playing a fairly key role; if the result of the referendum is a vote to leave, then this will go down to 1.5%, based on April’s analysis.
The OEC’s chief economist, Catherin Mann, said: “Even before the call for the referendum there was weakness. Subsequently there really has really has been deterioration in the investment climate.
“Concerns are percolating through the economy and the second quarter is still going to be under the cloud of the referendum. Its outcome will really give us our trajectory for the rest of the year.”
This assessment is echoed in the wording of the Economic Outlook report itself, which said: “rising uncertainty about the outcome of the referendum on the membership of the United Kingdom in the European Union, and a possible exit (Brexit), has led to a significant slowdown in economic activity.”
The report spoke of contracting business investment as increasing numbers of “spending decisions [are] put on hold”, and financial markets are beginning to “price in the risk of Brexit”.
If we do vote to leave, then a combination of reduced migration and an already weakening economy would hit productivity, the OECD said.
“The weaker UK economy, as well as possible new restrictions after exit from the European Union, would lower net migration inflows, adding to the supply-side challenges by reducing the size of the labour force.
“Some of these effects could be offset by reductions in domestic regulatory burdens, but the overall net effect on living standards would be strongly negative. By 2030, UK GDP could be over 5% lower than otherwise if exit had not occurred.”
The downgraded growth forecast for the UK contrasts with increased forecasts for Germany and France, although, as the OECD’s report went on to say, the impact of a Brexit would not be confined to the shores of the UK. Nor, even, would it be confined to Europe.
Fallout in Europe and the Rest of the World
Low productivity and weak economic performance generally in the UK would have a knock on effect on economies within Europe, most notably Ireland, the Netherlands and Luxembourg, who are describe as being “relatively highly exposed to the UK economy”, and Switzerland and Norway, who are “highly exposed through financial linkages”.
The countries like Ireland, Luxembourg and the Netherlands, who are described as ‘highly-exposed’ to the UK, would experience shocks roughly “between one third and one half” as severe as those felt in the UK.
More generally, said the OECD, “the UK decision to exit could reinforce uncertainty about the future of the European Union and the Single Market” leading to “more difficult financial conditions in other European countries.”
Any fallout to Europe that lowers demand within the continent, said the OECD, would subsequently affect other economies that are reliant on such demand.
“Weaker demand in the European economies also adversely affects the rest of the world, with GDP in the BRIICS [Brazil, Russia, India, Indonesia, China and South Africa] and other non-OECD economies lowered by over half a percentage point by 2018.
“Within these groups, Turkey and Russia are relatively heavily hit, reflecting their comparatively strong trade linkages with the European economies.”
While the OECD’s assessment has been welcomed by members of the remain campaign, including Chancellor George Osborne, those in the vote leave campaign criticised the assumptions it makes.
John Longworth, who runs the Vote Leave Business Council, said that the OECD’s report is “flawed” and that “it makes assumptions which have been roundly dismissed by senior economists.”
Longworth said that “the most important finding in today’s report is the acknowledgement that the UK economy with continue to grow after we vote to leave the EU.”
Criticising the OECD as bias he said: “Instead of listening to partisan advisory bodies, let’s look at what businesses are actually telling us: that the costly red tape and regulations emanating from Brussels are constraining their ability to innovate and create jobs.”
Earlier on Friday, the head of JP Morgan joined the heads of various businesses including HSBC, PwC, UPS and BT in backing the campaign to stay in the EU.
Jamie Dimon said: “At a minimum, a Brexit will result in years of uncertainty and I believe that this uncertainty will hurt the economies of both Britain and the European Union.”
He went on to say that JP Morgan “may have no choice but to reorganise our business model here” saying that “Brexit could mean fewer JP Morgan jobs in the UK and more jobs in Europe.”
Vote Leave responded to this and to the claims of other business heads who are in favour of remaining by saying that there was little evidence that EU membership has benefited anyone other than large multinationals.
“There is no significant evidence that the EU has benefitted the UK’s service exporters, but it has benefited the giant multinational companies which spend millions lobbying Brussels each year.”