OECD backtracks on Brexit warning after revising UK growth forecast

Brexit will not have as serious an impact as originally feared, the Organisation for Economic Cooperation and Development (OECD) said on Wednesday (21 September), as it backtracked on the warnings issued in the lead-up to the European Union referendum.

The organisation, one of the leading economic think tanks in the western world, has revised its growth forecast for the UK economy after a string of better-than-expected economic data following the referendum.

The Paris-based group, which had warned Britain would suffer a sharp economic slowdown if it chose to leave the EU, added the stimulus package adopted by the Bank of England (BoE) last month to revive the economy had also contributed to its decision.

The OECD now forecasts the UK economy to grow by 1.8% this year, a 0.1 point increase compared to the pre-referendum estimate, but then fall by more than it had previously envisaged. It has also downgraded its world growth estimates for both 2016 and 2017 by 0.1 point, to 2.9% and 3.2% respectively.

"While markets have since stabilised, sterling has depreciated by around 10% in trade-weighted terms since the referendum," the think tank said.

"For 2016, GDP growth has been supported by a strong performance prior to the referendum, even though business investment contracted.

"Developments to date are broadly consistent with the more moderate scenarios set out prior to the referendum and reflect prompt action by the Bank of England in August."

The think tank added Brexit had so far had a limited impact on the eurozone economy, although it warned the full repercussions of the UK's decision to leave the EU would not be fully apparent until next year.

"Spillovers to the global economy, notably the euro area, have been modest so far, including through confidence and financial markets weighing on investment," it said.

"More negative effects on the euro area are likely to become apparent in 2017."

The latest forecast is in stark contrast with the picture OECD's secretary general, Angel Gurria, painted in April, when he warned Brexit could lead to years of economic slowdown.

"From the moment of a Brexit vote until the arrangements for 'divorce' are definitively settled – years later there would be heightened economic uncertainty, with damaging consequences," he said at the time.

"Brexit would lead to a sell-off of assets and a sharp rise in risk premia. Consumer confidence would fall, as would business confidence and investment, thus holding back growth."

However, Catherine Mann, the OECD's chief economist, warned it was still too soon to claim Britain had weathered the Brexit storm, adding the original forecast had not considered any response from the BoE.

"When we made our forecasts we did not presume to speak about what the Bank of England might do," she said.

"The Bank entered the market forcibly on interest rates and to calm the markets. Nor did we presume to make any judgements about what fiscal policy might do."