OECD warns of major shocks to UK economy after Brexit

The UK economy would be subjected to severe shocks if it left the European Union, with GDP projected to be 3% lower in 2020 than if it remained, the Organisation for Economic Co-operation and Development (OECD) said.

In a report on the global economy, the OECD warned that 'Brexit' was becoming a “major downside risk”. The UK votes on the 'in/out' referendum on June 23.

“In the run-up to the referendum, financial markets have increasingly begun to price in the possible risk of Brexit, with a depreciation of sterling and an increase in risk premia across several asset types,” the OECD said.

“Business confidence has eased, policy uncertainty has risen and investment growth has slowed. However, the projections are conditional on the UK remaining in the EU, with growth beginning to pick up from the latter half of 2016.”

It added that a decision to exit would result in “considerable additional volatility in financial markets and an extended period of uncertainty about future policy developments, with substantial negative consequences for the United Kingdom, the European Union and the rest of the world”.

The OECD said the impact of leaving would be in line with with that of the euro area crisis of 2011-12, but “much smaller” that the bank-induced financial crisis of 2008.

“The exit vote can also be expected to hit confidence, leading UK households to undertake additional precautionary saving. Higher saving adds to the negative impact on consumption from the decline in activity and lower asset prices.”

Ironically, given the emphasis on controlling immigration from the 'Leave' campaign, the OECD said a departure would create supply-side challenges through a reduction in the available labour force once stricter visa rules were introduced.

“Lower trade openness would hit economic dynamism and productivity. The reduced access to the EU market would also lower inward foreign direct investment, with associated adverse effects on innovation and managerial quality,” it said

“Some of these effects could be offset by reductions in domestic regulatory burdens, but the overall net effect on living standards would be strongly negative. By 2030, UK GDP could be over 5% lower than otherwise if exit had not occurred.”