The influential Organisation for Economic Co-operation and Development (OECD) said the deadlock in the exit talks now threatened a “disorderly Brexit”, with severe consequences.
Its report controversially puts the case for a dramatic rethink on the agenda – suggesting halting EU withdrawal is a route to avoiding that fate.
“In case Brexit gets reversed by political decision (change of majority, new referendum, etc), the positive impact on growth would be significant,” the report said.
The suggestion is certain to infuriate Brexiteers, but will bolster campaigners calling for the British public to be given a second vote, when the “facts of Brexit” are known.
The report was immediately seized on by one pro-EU group as the “final nail in the coffin for the already long-buried notion that Brexit will benefit our economy”.
The OECD analysis suggests a “no-deal” Brexit would wipe up to a staggering £40bn off UK economic growth by 2019.
The UK economy will grow 1.5 per cent slower in 2019 if the country crashes out of the EU without a trade deal or a transition deal with the bloc in March 2019, it said.
Crucially, it makes the assumption that trade talks will break down - triggering a hard Brexit and slapping tariffs on imports and exports between the EU and UK.
Wes Streeting, a Labour MP and supporter of the Open Britain group, said: “Today’s OECD analysis should be the final nail in the coffin for the already long-buried notion that Brexit will benefit our economy.
“A hard Brexit or walking away without a deal would wreak even more punishment on the UK economy.
“The Government can avoid this if they drop their ideological and self-imposed red lines and start negotiating for continued membership of both the single market and the customs union.”
The Liberal Democrats – who support a further referendum, at the end of the negotiations - said the OECD’s report bolstered its campaign.
“This is a significant intervention the Government cannot afford to ignore,” said Jo Swinson, the party’s deputy leader.
“The case for protecting the economy by reversing Brexit is getting stronger by the day. Once the facts are clear at the end of this process, the British people must have the final say with a chance to exit from Brexit.”
The OECD admitted that Brexit negotiations were difficult to forecast, and could "prove more favourable" than assumed in its report - boosting trade, investment and growth.
But it warned the very real threat of no deal would spark a sharp reaction by financial markets, sending the exchange rate to new lows and leading to a downgrade in the UK's sovereign rating.
"Business investment would seize up, and heightened price pressures would choke off private consumption,” the report said.
“The current account deficit could be harder to finance, although its size would likely be reduced.
There are also risks that Scotland and Northern Ireland could vote to stay in the EU, in a second referendum, which would have a “major” impact on the national economy.
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