Theresa May will fail to deliver EU trade deal in 2019 and UK heading for cliff-edge Brexit, OECD predicts

Overwhelming majority of economists expect that trading with the EU on World Trade Organisation rules would be highly damaging for the UK economy

Ben Chu
Economics Editor
Wednesday 07 June 2017 17:04
OECD General Secretary Angel Gurria unveils its latest Global Economic Outlook in Paris
OECD General Secretary Angel Gurria unveils its latest Global Economic Outlook in Paris

Theresa May will fail to secure a comprehensive free trade agreement with the rest of the EU by 2019 in a development that would mean a destructive “cliff-edge” Brexit for the UK, the Organisation for Economic Co-operation and Development (OECD) has predicted.

In its latest Global Economic Outlook report, the Paris-based multilateral economic organisation has upgraded its 2017 GDP growth forecast for the UK to 1.6 per cent, up from 1.2 per cent last November.

But it is still anticipating a sharp slowdown in UK growth to just 1 per cent in 2018.

“This projection critically assumes that 'most favoured nation' treatment will govern UK trade after the United Kingdom leaves the European Union in 2019," the OECD says, referencing a description of the way that countries must trade with each other under minimal World Trade Organisation rules.

In her Lancaster House speech in January, Theresa May said that she wanted to conclude a “a new, comprehensive, bold and ambitious free trade agreement” with the rest of the EU.

The Prime Minister also signalled her willingness to agree a “transitional” deal post 2019, which would allow trade to carry on unimpeded while such an overarching free trade agreement was concluded.

But she also warned that “no deal is better than a bad deal”, implying that she could also walk away from the negotiating deal and that the UK could crash out of the EU’s single market and customs union with no new agreement in place.

That latter threat was also contained in the Conservative manifesto.

The WTO outcome would imply, among many other things, 10 per cent tariffs on UK car exports to the EU, tight quotas on agricultural exports and an abrupt end to the right of UK financial firms to operate in Europe.

The OECD’s baseline assumption is that this is what materialises – and also that the UK has no other new free trade deals with other non-EU countries in place by 2019.

It said that the channels through which this would likely adversely impact the UK economy next year were through weaker household consumption, confidence and investment.

“The major risk for the economy is the uncertainty surrounding the exit process from the European Union. Higher uncertainty could hamper domestic and foreign investment more than projected,” the OECD writes.

Catherine Mann, the OECD’s chief economist, told The Independent that it was sticking with the same WTO Brexit outcome it used in previous UK forecasts made since last June's referendum.

“Discussions regarding the nature of trade modalities, the timetable for any deal, as well as interim agreements are ongoing between the UK and the EU. We continue with the same assumption of WTO 'Most Favoured Nation' basis, as in our previous projections." she said.

The overwhelming majority of economists expect that a cliff-edge Brexit would be highly damaging for the UK economy.

Researchers from the London School of Economics estimate that it would cost 2.6 per cent of GDP by 2020, rising to 9.5 per cent by 2030.

The one detailed study that argues trading on WTO rules post 2019 would boost the UK economy has been severely criticised as methodologically flawed and making wildly implausible assumptions.

Business groups have warned loudly about the catastrophic impact of a "no deal" Brexit, with the CBI president Paul Dreschler saying it would “open Pandora's box” for firms.

In its latest report, the OECD also argues that Britain needs a major increase in infrastructure spending, something more in line with Labour's manifesto pledges than the Conservatives'.

"Higher investment in transport infrastructure, in particular in less productive regions, would improve connectivity and the diffusion of knowledge," the OECD says.

Labour's manifesto also promises a free trade agreement with the EU and explicitly rejects "no deal" as a viable option.

The UK's GDP growth slowed to just 0.2 per cent in the first quarter of 2017, well down from the 0.7 per cent expansion in the final quarter of 2016.

This was the joint slowest quarterly expansion of any G7 country, alongside Italy, although growth is expected to pick up somewhat in the following quarter.

Responding to the OECD report, Sir Vince Cable, the Liberal Democrat Treasury spokesman, said: “Voters should listen to this eve of poll warning on the major economic risk posed by Theresa May’s reckless approach to Brexit.

"The hardline approach [she] has taken, insisting that no deal is better than a bad deal and planning to take us out of the single market, will seriously damage opportunities and jobs for years to come. The Liberal Democrats will fight to keep Britain in the single market and customs union, and to ensure the people have the final say on the Brexit deal.”

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