The latest UK economic survey by the think-tank is currently projecting economic growth of just 1% in 2018, saying that the uncertainty of Brexit negotiations is likely to leave the UK without a free-trade agreement with the EU by its official exit date in 2019.
It warned that Britain’s economic prospects could be further hit by a “disorderly Brexit” if negotiations between the EU and UK are cut short, triggering 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 current account deficit could be harder to finance, although its size would likely be reduced,” the report warned.
There are also risks that Scotland and Northern Ireland could vote to stay in the EU, which would have a “major” impact on the national economy.
But the Paris-based OECD has suggested the UK could dodge those risks through a Brexit reversal.
“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 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 stressed that this would require “an ambitious EU-UK agreement and a transition period to allow for adjustment to the new agreement”.
“Meantime, however, uncertainty could hamper domestic and foreign investment more than projected and hurt consumption even more were the exchange rate to depreciate further,” it added.
Brexit has compounded the challenge of reviving labour productivity growth, which the OECD said had come to a “standstill” and made “no meaningful contribution” to UK output since 2007.
The report highlighted that labour productivity was also weakest outside of Greater London and the South East of England.
This kind of disparity between regions and workers “may lead to, or be the result of, important differences among people in terms of income and wealth, jobs and earnings, and education and skills.”
“Well-being inequalities may have been one of the causes of Brexit, as less-educated workers in remote regions might have perceived to benefit less from the European project,” it added.
The report put forward a number of recommendations to address productivity and job quality of low-skilled workers, including investment in transport links within and between cities, continue devolution measures, additional training, restricting self-employment to independent entrepreneurs, and granting zero-hours contract workers increased job security after three months.
Responding to the OECD report, a spokesman for the Treasury said: “Increasing productivity is a key priority for this Government, so that we can build on our record employment levels and improve people’s quality of life.
“Today, the OECD has recognised the importance of our £23 billion National Productivity Investment Fund which will improve our country’s infrastructure, increase research and development and build more houses.
“In addition, our reforms to technical education and our ambitious Industrial Strategy will also help to deliver an economy that works for everyone.”