Monday 28 November 2016 11:18 am

The OECD becomes the latest in a long line of forecasters to downgrade UK GDP growth prospects after EU referendum

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UK growth will fall sharply in 2017 as uncertainty following the vote to leave the European Union weighs on Britain’s prospects, according to an influential intergovernmental trade group.

Real GDP growth will decline from two per cent for this year to 1.2 per cent in 2017 and one per cent in 2018, according to the Economic Outlook published by the Organisation for Economic Co-operation and Development (OECD).

“Uncertainty about the future direction of policy, the relationship between the United Kingdom and the European Union, and the reaction of the economy remains high, and is likely to persist even beyond an assumed departure from the European Union in 2019 with trade arrangements based on most favoured nation (MFN) rates,” the report said.

The UK is also set to underperform the rest of the world, which is forecast to grow by 3.3 per cent in 2017 and 3.6 per cent in 2018.

“There is now some prospect of the world exiting from the low-growth trap,” said Angel Gurria, secretary general of the OECD.

Read more: "One cannot stress enough how dreadful it is": Dire warning on wage growth

The OECD also joined economists and central bankers from around the world in calling for stimulative infrastructure spending.

Gurria said: “The OECD is calling for spending to be focussed on areas that boost growth, like high-quality infrastructure investment, education and skills. It should also be targeted to make growth more inclusive.”

The UK's growth will decelerate while the rest of the world speeds up, says the OECD

While chancellor Philip Hammond did announce an increase in spending, including a new £23bn National Productivity Investment Fund, the OECD does not predict that this will boost the UK economy significantly.

The UK’s real GDP growth will fall to the same levels as Russia and Italy by 2018, the OECD said, which would leave only Japan of the G20 group with a lower GDP growth rate in two years’ time.

Read more: Deutsche drag: German GDP underperformance weighs on Eurozone growth

The OECD projections are the latest in a long line of downgrades to UK growth prospects by influential economists since the June referendum. Last week the government’s official forecaster, the Office for Budget Responsibility, downgraded UK growth to 1.4 per cent in 2017 and 1.7 per cent in 2018.

In light of the weakness, the OECD called for prudence and "caution" in raising the National Living Wage. The report said: "Caution is needed with the implementation of the policy to raise the National Living Wage to 60 per cent of median hourly earnings by 2020." 

The OECD also had a thinly veiled criticism of the policies of new US President-elect Donald Trump.

Gurria said “The temptation to use protectionist policies to boost demand for domestic production is high. But world trade growth is already exceptionally weak. In 2016, we expect world trade volumes to expand by less than global GDP for only the third time in the past 30 years. This ebbing of trade intensity weakens competitive pressures and is bad for productivity growth.”

“Protectionism and the inevitable trade retaliation would offset much of the positive effects of proposed fiscal initiatives on domestic and global growth,” said OECD chief economist Catherine Mann.