The OECD’s chief economist, Catherine Mann, presents the organisation’s interim economic outlook in Paris. Photograph: Eric Piermont/AFP/Getty Images
The west’s leading economic thinktank has backtracked on its warning that the UK would suffer instant damage from a Brexit vote and has thrown its weight behind plans by Theresa May to provide fresh post-referendum support to growth in November’s autumn statement.
The Paris-based Organisation for Economic Cooperation and Development, which issued strong warnings about the likely impact of a vote to leave the EU ahead of the 23 June vote, has revised up its forecast for growth this year as a result of a stronger-than expected performance in the first half of 2016 and action by the Bank of England in August to spur activity.
Until recently a staunch supporter of George Osborne’s austerity plan, the OECDsaid it was appropriate for the new chancellor, Philip Hammond, to increase public spending in his first major policy statement later this year.
It said it was still predicting a sharp slowdown in the economy, but that this would not happen until 2017. It said that the expected negative effects on the rest of the global economy of the Brexit vote – compared in June to the equivalent of a hard landing for China – had also been delayed.
The referendum result had led to high volatility in financial markets and a rise in uncertainty, the OECD said in its interim economic outlook.
“While markets have since stabilised, sterling has depreciated by around 10% in trade-weighted terms since the referendum. 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. However, GDP is projected to slow to 1% in 2017, well below the pace in recent years and forecasts prior to the referendum.
“Spillovers to the global economy, notably the euro area, have been modest so far, including through confidence and financial markets weighing on investment; more negative effects on the euro area are likely to become apparent in 2017.”
The OECD’s current assessment contrasts with the comments made by its secretary general Angel Gurria in April when he said: “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. 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.”
Catherine Mann, the OECD’s chief economist said it was premature to say there would be no possible consequences for the UK from Brexit and that its pre-referendum estimates had taken no account of possible policy changes by the Bank of England and the Treasury.
“When we made our forecasts we did not presume to speak about what the Bank of England might do. The Bank entered the market forcibly on interest rates and to calm the markets,” she said.
“Nor did we presume to make any judgements about what fiscal policy might do,” she added, noting that Hammond had signalled higher public spending in the autumn statement. “It all adds up to appropriate policy support.”
The OECD said it expected the UK economy to grow by 1.8% this year, a 0.1 point increase on its pre-referendum estimate, but then fall by more than it had previously envisaged. It also shaved its world growth estimates for both 2016 and 2017 by 0.1 point, to 2.9% and 3.2% respectively.
Mann said it was right to say that the OECD, hitherto a strong supporter of austerity policies in the UK and elsewhere in the developed world, was “changing its tune”.
She said there were three reasons for the rethink: countries had implemented a lot of austerity; global growth was flat-lining, and ultra-low interest rates had created conditions in which governments could borrow cheaply.
Action was needed to lift the global economy out of a low-growth trap, she said. “The spiral is not upwards, it is downwards. Downwards on trade, downwards on productivity, downwards on global growth.”
The OECD fears that weak growth, stagnant living standards and rising inequality are eroding support for globalisation and making it harder for governments to pursue structural reforms.
“All countries have room to restructure their spending and tax policies towards a more growth-friendly mix by increasing hard and soft infrastructure spending, and using fiscal measures to support structural reforms” the interim outlook said.
“Concrete instruments include greater spending on well-targeted active labour market programmes and basic research, which should benefit both short-term demand, longer-term supply, and help to make growth more inclusive.”