OECD: Reversing Brexit would give "significant" boost to UK economy

 
Catherine Neilan
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BRITAIN-WEATHER
UK labour productivity is now 20-25 per cent behind that of the US, France and Germany (Source: Getty)

Reversing Brexit would give the UK economy a "significant boost" the Organisation for Economic Co-operation and Development has claimed.

A major report, presented in London today, claims that increasing domestic pressures combined with the uncertainty of Brexit could hamper growth in the medium term.

The 130-plus page report states that after a "good performance" in 2016, growth in real GDP per hour worked in the first half of this year slowed to the lowest annualised rate in the G7. While noting the drop in unemployment to 4.5 per cent, the OECD also highlighted the fall in real wages. As a result, UK labour productivity is now 20-25 per cent behind that of the US, France and Germany.

Brexit could exacerbate that problem, the report claims, suggesting it could reduce total factor productivity by about three per cent after 10 years. This was mainly down to "the channel of diminished trade openness, but also owing to a weaker research and development intensity and a smaller pool of skills".

Ahead of last year's referendum, the OECD warned of immediate negative consequences following a vote to leave, but subsequently rowed back on the warning after stronger than expected growth in the months after the vote. The organisation concedes in today's report that the outcome of Brexit "could prove more favourable than assumed here."

Nevertheless, the report noted the UK's planned withdrawal from the European Union has "raised uncertainty and dented business investment, compounding the productivity challenge". Reversing the decision, either through a second referendum or a change of government, would result in a "significant" boost to the economy.

In yet another sign a so-called no deal could damage the country's economy in future, the OECD claimed a "disorderly" exit will damage long-term growth. Failing reversal, it suggests the "closest possible EU-UK economic relationship would limit the cost of exit".

Read more: How the UK can plug the productivity gap

Speaking today in London, OECD secretary general Angel Gurria said: "The UK is facing challenging times, with Brexit creating serious economic uncertainties that could stifle growth for years to come. Maintaining the closest economic relationship with the EU will be absolutely key, for the trade and goods and services as well as the movement of labour."

Recommendations

The OECD called on the government to deploy "automatic stabilisers" to help identify and develop productivity-enhancing initiatives, which can be implemented "rapidly" in the event Brexit causes growth to weaken further. This could include spending on repair and maintenance or "soft" investment.

A tax and spending review should also be carried out in order to pay for costs, with the OECD suggesting the self-employed start paying national insurance, or that the state pension be indexed on average earnings.

The OECD also warned high consumer debt combined with "stagnant" incomes poses a "major financial stability risk", urging the government to introduce debt-to-income borrowing ratios.

In terms of Brexit, the OECD called for a transition period to be implemented and for the labour market to "remain open" to foreign workers.

The report reiterated the findings of its 2016 study which claimed adopting the WTO framework for trade deals will wipe off 1.5 percentage points from the UK's growth. A transition period will "reduce the economic consequences in the run-up to Brexit and right after", it says.

Read more: Data skills will solve Britain’s productivity puzzle

Productivity puzzle

The UK's productivity puzzle has loomed large since the 2008/09 crash, but there is still no satisfactory explanation as to why.

The UK has one of the greatest regional disparities among the 35 member states of the OECD. Greater London outperforms all other parts of the UK in all but two sectors, most significantly in financial services. Only construction and manufacturing experience greater productivity outside the capital.

The OECD noted this disparity may have been one of the factors which contributed to the Brexit vote last summer, with remote regions being perceived as benefiting less from being part of the EU.

Read more: It’s low productivity that is holding down wages

Change the narrative

But economist Ruth Lea told City A.M. the OECD's findings were symptomatic of analysis that was "forever exaggerating the negative".

"I'm getting so tired of all this," she added. "They’ve all got themselves in some kind of negative time warp. They were very negative prior to the referendum and can’t get out of that way of thinking. They're locked into this negative way of thinking.

"A lot if it is because they feel they have to continue with this narrative to justify themselves nad have some appearance of consistency. But it’s time they really began to change the narrative, move the dial - this country is leaving the EU and everyone has to now accept that."

Cardiff Business School professor Patrick Minford called on the OECD to reveal more about its modelling and assumptions, saying the OECD's negative findings were at odds with his own and others' workings, including Oxford Economics adviser Graham Gudgin.

He added: "The OECD has always said we shouldn't leave the EU. It's pretty easy to see why, most of their members are in the EU - it's no mystery that they are going to have an institutional bias to find reasons to reject Brexit."

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