OECD: UK economy will slow this year and next

OECD: UK economy will slow this year and next

The UK economy will slow in 2017 and 2018 primarily due to uncertainty about the outcome of Brexit talks, according to the Organisation for Economic Cooperation and Development ( OECD) in its June Global Economic Outlook.

The OECD assessment is based on the belief that the UK will not be able to negotiate a comprehensive free trade agreement with the EU by May 2019 and will then face WTO tariffs on its exports to Europe.

“This projection assumes that the United Kingdom’s external trade will operate on a most favoured nation basis from April 2019. The uncertainty, and the assumed outcome, is projected to undermine spending, in particular investment. Policies have supported private confidence and consumption, but household spending is projected to ease as the combination of a weakening labour market and higher inflation reduces real wage growth.”

While global growth is expected to strengthen to more than 3.5% next year, in the UK it will fall from 1.6% to 1.0%.  It notes that inflation in the UK has now passed the target rate of 2% a year and puts this down to the effects of sterling’s depreciation.

Other studies indicate that inflation is likely to rise further: Britain imports almost 40% of its food and must now pay for the imports with a pound that has lost more than 14% of its value.  Forward buying and other hedging contracts agreed before the referendum can be assumed to have run out by now so the full impact of depreciation is being felt.

The relatively strong performance of the economy over the last year has been largely put down to growth in personal consumption as a slowdown in business investment has been established, but inflation will now bring this process to an end: “Private consumption growth is projected to slow, as higher inflation holds back real earnings.”