Cliff Taylor: OECD lobs a grenade into the Brexit debate

The OECD has lobbed a grenade into the Brexit debate, estimating a major hit to growth in 2019 if the UK leaves without a deal and saying that the flip-side would be a boost to UK growth expectations if the Brexit decision was reversed. As talks between Britain and the EU fail to progress, the OECD intervention puts some stark numbers on what a hard Brexit could mean - which in turn underlines the threat to our own growth prospects.

There was fury in London at a sentence in the OECD document which said that if the Brexit decision was reversed, “the positive impact on growth would be significant.” The UK Treasury responded with a short statement saying:” We are leaving the EU and there will not be a second referendum.”

There was fury in London at a sentence in the OECD document which said that if the Brexit decision was reversed, "the positive impact on growth would be significant."

The OECD, a Paris- based think tank with 34 members from the richer world economies, may not have wished to cause a political fuss, but its economic message is clear. The run up Brexit will slow UK growth to 1 per cent next. And if there is a hard Brexit, it would knock a full 1.5 percentage points off growth in 2019, the year Britain is due to leave, although the OECD has not yet said what it expects growth to be that year.

Stark language

The language is stark. A hard Brexit would mean Britain leaving without a deal, with tariffs and other trade barriers immediately put in place under World Trade Organisation rules, damaging UK exports and putting up prices for consumers. Sterling could collapse, the OECD warns, pushing up inflation and hitting purchasing power. " Business investment would seize up and heightened price pressures would choke off private consumption."

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The potential chaos of a "no deal" Brexit would clearly also provide big problems for Ireland and particularly for trade with the UK and potentially the Border. The difficulty for economic forecasters - particularly those in the Department of Finance - is trying to judge what the outcome of talks will be and then what it mightmean.

The initial growth hit after the Brexit vote did not emerge, meaning widespread upgrading of Irish growth forecasters for this year. However with UK growth now slowing and the potential, as the OECD outlined, of a big 2019 hit to UK growth in the event of a hard Brexit, big uncertainties still lie ahead.

Official Ireland forecasts have already baked in a 3.5 per cent cut to growth over 10 years after Brexit, but the immediate risk is of a bigger-than-expected hit in 2019-2020, in the event of a “no deal” Brexit.

Little progress so far

The OECD warnings of a big hit to UK growth and a further drop in sterling are both obvious threats for us. The OECD also warns of the “major negative economic impacts” of any changes to the UK’s borders with Scotland and Ireland. Examining the ideas put forward by the UK to make borders - including the one on the island of Ireland - as frictionless as possible, if the UK leaves the single market and customs union, the OECD dismisses many as either “ unprecedented” or “ untested.” This highlights the difficulties of limiting the impact on the Border, particularly if Britain leaves the customs union.

The OECD says the UK could cut the economic damage by agreeing a transition period after it leaves the EU - giving time to negotiate a new trade deal with the EU. The OECD feels such a deal might be negotiated by 2023. However so far little progress has been made in talks between Brussels and London, with all eyes now on this week’s EU summit.

Warnings about the economic dangers of a hard Brexit are growing. On Monday a study by the Resolution Foundation and the University of Sussex estimated it could cost the average UK household £260 per year as import prices rise, with some larger poorer households hit by as much as £500. Concern is also growing about massive job losses in the City of London and in some other sectors. Yet the toxic politics in the UK are mitigating against a deal.