Annual growth will fall below 1% for first time in decade even with a deal, says thinktank

This article is more than 1 year old

This article is more than 1 year old

A no-deal Brexit would plunge the UK economy into recession and annual growth will slip below 1% this year for this first time since the financial crisis even if a deal is secured, the Organisation for Economic Cooperation and Development (OECD) has warned.

The thinktank, which advises 34 of the world’s richest countries, said that even with a smooth Brexit, the UK economy would slump to 0.8% growth in 2019 from 1.4% in 2018 as Brexit uncertainty and Donald Trump’s trade war with China harmed the UK’s economic prospects. In November it was forecasting 1.4% growth for the UK this year.

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The last time annual growth in the UK was below 1% was in the depths of the financial crisis, when the economy contracted by 4.2%.

The OECD said a steep fall in investment over the past year by UK-based firms had left the economy in a weak position to boost its poor productivity rates and increase wages growth.

The economic health check comes as a string of major manufacturing firms have made clear that their future in the UK is in doubt should the government fail to secure a transition arrangement that allows them to trade freely inside a customs union with the EU.

Toyota’s European boss, Johan van Zyl, said he could not promise British employees’ jobs were safe until the outcome of Brexit was decided.

Meanwhile, the BMW board member Peter Schwarzenbauer, who oversees the Mini and Rolls-Royce brands, said the firm might be forced to stop making the Mini at its Cowley plant near Oxford.

The OECD chief economist, Laurence Boone, said the UK had missed out on 0.7% of growth compared with the OECD’s previous projections and 1.7% of growth compared with the US, France and Germany.

“There is no better trade agreement for the UK than the EU single market. Every step back from this arrangement makes it more difficult for the private sector,” she said.

In 2017 the OECD boss, Angel Gurría, clashed with the UK chancellor, Philip Hammond, when he suggested that a second referendum on EU membership would significantly benefit the economy.

Like most international agencies, the OECD has warned that leaving the EU will harm foreign investment into the UK and lower potential growth.

The failure to secure a deal and transition period would probably plunge the economy into recession that “could be stronger still if a lack of adequate border infrastructure and a loss of access to EU trade arrangements with third countries were to cause serious bottlenecks in integrated cross-border supply chains”, it said.

“The costs would also be magnified if this also induced a further decline in business and financial market confidence and disruptions in financial markets. In such a scenario, the likely near-term recession in the United Kingdom would generate sizeable negative spillovers on growth in other countries,” the report added.

John McDonnell MP, the shadow chancellor, accused Philip Hammond of “standing idle” while the economy got “weaker and weaker”.

He said: “These downgraded growth forecasts from the OECD, leaving predicted UK growth at under 1% in 2019 and 2020, highlight the impact of a botched Brexit and sustained austerity.”

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Boone, a French national who gained a PhD at the London Business School before going on to advise a string of investment banks and latterly the former French president François Hollande, said the global expansion lost momentum last year and would continue to slow in 2019, easing to 3.3% from the previous forecast of 3.5%.

The biggest reductions in growth were seen in the euro area and across Asia, she said.

“The foundations of the global economy are shakier than a year ago and any further shocks will only make the situation worse.”

Mario Draghi, the president of the European Central Bank, is expected to downgrade economic growth forecasts for the eurozone after officials meet on Thursday.

In December the ECB was forecasting growth of 1.7% in 2019-20 and 1.5% in 2021. Analysts said these predictions were optimistic and likely to be brought closer into line with European commission forecasts of 1.3% and 1.6% in 2019 and 2020, respectively.

The OECD said the eurozone would grow at just 1% this year compared with the previous forecast of 1.8%.

One of the main drags on global growth over the past year has been a series of increases by Trump in tariffs on Chinese exports to the US. The White House has also threatened the EU with tariffs on European-made cars exported to the US and accused India of dumping subsidised goods on American markets.

Global trade slipped last year and would again if protectionist barriers were raised, the report said.

“The trade restrictions introduced last year are a drag on growth, investment and living standards, particularly for low-income households,” it said.

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Boone said the world’s richest countries risked another decade of stagnant wages unless they coordinated investment and trade policies. OECD figures show that coordinated efforts to invest in infrastructure bring higher rewards than when countries act alone.

She said the EU was the ideal platform for policymakers to combine their efforts, especially when it means that for every £5 spent on infrastructure, governments gained £10 in additional economic activity.

“This is leaning against the prevailing wind, for sure, but it is necessary to point out that cooperation helps development and improves the living standards of the poorest.”

Last year the OECD said it was anxious that growth across the globe remained dependent on cheap borrowing and government spending.

Boone said she was still concerned by high levels of debt in China, Europe, the US and in many emerging market economies, which weakened the spending capacity of governments should there be another financial crash.