The OECD has slashed its 2017 growth forecast for the UK in half as a result of the Brexit vote and warned of “very high” uncertainty ahead.
The multilateral economics institution had projected UK GDP growth next year of 2 per cent in June, but today reduced that to just 1 per cent in its latest Interim Economic Outlook.
That was easily the largest downgrade for any major advanced economy.
The OECD acknowledged that financial markets had stabilised since the immediate volatility in the wake of the referendum and that swift action by the Bank of England had helped.
But the Paris-based institution, which is funded by member countries, said it still saw major risks ahead.
“Uncertainty about the future path of policy and the reaction of the economy remains very high and risks remain to the downside,” it said.
The UK’s 2016 forecast, however, was revised up from 1.7 per cent to 1.8 per cent.
In response to the latest forecast Chancellor Phillip Hammond, said: “The OECD highlights uncertainty in their outlook, and while I recognise that there may be some difficult times ahead, I am confident that we have the tools necessary to support the economy as we adjust to a new relationship with the EU and take advantage of the opportunities that it offers.”
However, the OECD forecast for the UK is much less dire than what its chief economist, Catherine Mann, presented in June.
She said then that the possible economic impact of Britain voting to leave the EU would be “in the same ball park” as a hard landing for the Chinese economy, the second largest in the world.
In April, OECD forecast that a Brexit vote would cost each UK household around £2,200 by 2020.
Many City of London forecasters have been revising away their initial forecasts of a recession this year in light of better than expected economic data in the wake of the vote – although like the OECD they generally still expect a sharp slowdown next year.
“As the available information grows, the referendum result appears, so far, not to have had a major effect on the UK economy. So it hasn’t fallen at the first fence but longer-term effects remain to be seen,” said the chief economist of the Office for National Statistics Joe Grice today, pointing to resilient retail sales data for July and August.
Various forward-looking economic survey indicators present a clouded picture.
A report from Markit, also released today, showed that British households’ expectations about their personal finances held steady in September in another indication that consumers are so far riding out the referendum result.
Markit’s Household Finance Index was 44.8 this month, largely flat on the 44.9 in August and maintaining the recovery from July in the immediate aftermath of the referendum when it dipped sharply to 42.
Consumers still buoyant...
However, the latest survey from the Bank of England regional agents, released today, showed the confidence of businesses has been slipping in the third quarter of the year, pointing to stagnant investment spending and hiring over the next 12 months.
...but business bruised
“The annual rate of activity growth has slowed overall as uncertainty had risen following the EU referendum, although it remained positive,” the Bank said.
Matthew Whittaker, chief economist at the Resolution Foundation, said the figures highlight the divergence between nervous businesses and apparently resilient consumers.
“How the sentiments of these two groups converge over the coming months will play a key role in determining how well the economy performs in the lengthy period between the decision to leave the EU and the moment we pass through the exit door,” he said.
The OECD’s 2016 global growth forecast was shaved down to 2.9 per cent from 3 per cent previously.
The 2017 forecast was also reduced slightly to 3.2 per cent from 3.3 per cent before, which the OECD stressed was “well-below historical norms”.
The OECD warned the world economy was in a “low growth trap” with persistent growth shortfalls, which lowered expectations and prompted weak trade, investment and wage growth.
The OECD gave encouragement to the Chancellor’s signal that he will increase infrastructure investment in the Autumn Statement on 23 November, to help boost the UK economy in the wake of the Brexit vote.
“All countries have room to restructure their spending and tax policies towards a more growth-friendly mix by increasing hard and soft infrastructure spending, and using fiscal measures to support structural reforms,” it said, warning that monetary policy had become “overburdened” with supporting growth.
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