Brexit economic shock equivalent to natural disaster, says OECD

The multilateral organisation has been forced to suspend the publication of its monthly economic indicators, explaining that the Leave vote has created disruption similar to that in the wake of Japan's devastating 2011 earthquake

Ben Chu
Economics Editor
Monday 11 July 2016 10:37
Comments
Devastation from a Japanese earthquake
Devastation from a Japanese earthquake

The economic shock and disruption delivered by Brexit is on a par with the impact of devastating and unforeseen natural disasters, such as the 2011 Japanese earthquake, the OECD said today.

The multilateral organisation has been forced to suspend the publication of its monthly “Composite Leading Indicators” (CLIs), which are designed to flag potential turning points in economic activity around the world by sifting through a wide array of data.

The OECD is proud of the accuracy of its indicators and boasts that they have been an “effective tool” in periods of “extreme volatility” in global financial markets in recent years, including during the 2008 global financial crisis and the eurozone emergency of 2012 and 2013.

But the Paris-based OECD, which is funded by member states, said the latest batch of CLIs covering the period up to the end of last month had been rendered grossly misleading by the surprise vote by the British public to leave the European Union on 23 June, which sent sterling plunging to 31 year lows and prompted major sell-offs in global stock markets.

“The CLIs cannot…account for significant unforeseen or unexpected events, for example natural disasters, such as the earthquake, and subsequent events that affected Japan in March 2011, and that resulted in a suspension of CLI estimates for Japan in April and May 2011” the OECD said in a statement this morning.

“The outcome of the recent (23 June) Referendum in the United Kingdom is another such significant unexpected event, which is affecting the underlying expectation and outturn indicators used to construct the CLIs regularly published by the OECD, both for the UK and other OECD countries and emerging economies.”

But unlike in the wake of the Tohoku earthquake, which was the most powerful ever to strike the country and which killed almost 16,000 people, when the CLIs were suspended only for Japan, this time the CLIs for not only for the UK but for all the other countries covered by the OECD’s indicators will not be released.

They are not expected to recommence publication until September now, when the OECD says the data should reflect the Brexit impact on global economic activity and finamcial markets.

During the referendum campaign the OECD flagged the negative global economic effects of a Brexit vote by the British people, warning that it posed as large a threat to the global economy as a crash in the Chinese economy.

“We have done a lot of work on what a hard landing in China would mean. It is in the same ball park as Brexit” said the OECD’s chief economist, Catherine Mann, last month.

Angel Gurria, the OECD's secretary general, said leaving the UK would create such a negative short-term impact on UK living standards that it would "like a tax".

"It is the equivalent to roughly missing out on about one month's income within four years but then it carries on to 2030. That tax is going to be continued to be paid by Britons over time" he told the BBC.

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