Britain’s economy faces a double risk to recovery from a disorderly Brexit as the coronavirus pandemic drags down growth, the Organisation for Economic Co-operation and Development has warned.
On the eve of a critical EU leaders’ summit in Brussels, the influential Paris-based thinktank said the Covid crisis would further complicate a disorderly Brexit as companies were less prepared for the end of the transition period, having diverted attention away from leaving the EU.
It warned that failure to secure a free trade agreement before the UK leaves the Brexit transition period at the end of December would leave the economy 6.5% lower in the next few years than would have been the case if existing arrangements with the EU had been maintained.
In a development with potential to cause severe disruption for cross-border trade, it said a disorderly Brexit would have the most significant impacts for manufacturing, with the UK car industry, food and textiles producers hardest hit, suffering a fall in exports of more than 30%.
Álvaro Pereira, the director of the country studies branch at the OECD, said: “We know Covid has been the largest economic shock and social shock in the last few decades all across the world. Brexit obviously compounds the issue.
“The most important thing in the next few days and months is to focus on a deal, so the closest possible relationship is established between the UK and EU. Both parties lose if there is no deal.”
Publishing its first major economic survey of the UK since 2017, the OECD said a disorderly Brexit had potential to compound the risks to the British economy from Covid-19.
After a tight lockdown earlier this year and continued restrictions as coronavirus infections continue to rise, it said GDP was on track to fall by 10% this year, before recovering by 7.6% in 2021.
Praising the government’s interventions to protect jobs through the furlough scheme, it said the hit to unemployment triggered by the pandemic would drive up the jobless rate to 5.3% in 2020 from about 4% at the start of the year, rising to 7.1% in 2021. This is lower than the estimate from the Office for Budget Responsibility, the Treasury economics forecaster, which is predicting a hit to employment at the end of this year on a par with the 1980s.
Assuming a Brexit deal would be secured, the OECD warned the UK economy outside the EU would still be 3.5% smaller within the next few years compared with staying in the single market and customs union. It warned unemployment would also be about one percentage point higher than would have otherwise been the case.
The organisation, which represents more than 30 advanced economies around the world, said the damage to growth and jobs could be exacerbated by tougher controls on migration but that efforts to secure closer ties between Britain and the EU could reduce the hit to GDP from leaving to about 3.2%.