November 28, 2017 / 10:22 AM / a year ago

Stay close to EU to reduce Brexit's economic hit, OECD tells UK

LONDON (Reuters) - Britain should seek the closest possible relationship with the European Union after Brexit if it wants to reduce the hit to its economy, the Organisation for Economic Co-operation and Development said on Tuesday.

The Secretary-General of the Organisation for Economic Co-operation and Development (OECD) Jose Angel Gurria, from Mexico, presents the organization's Economic Survey of the UK during an OECD press conference at the Treasury in London, Britain, October 17, 2017. REUTERS/Matt Dunham/Pool

Britain’s economy is already growing more slowly than many of the world’s rich nations, due to the impact of higher inflation since the referendum decision to leave the EU and uncertainty about the outcome of the Brexit talks.

“The major risk for the economy is the uncertainty surrounding the exit process from the European Union, which could hold back private spending more than projected,” the OECD said in a semi-annual report on the global economy.

“However, prospects of maintaining the closest possible economic relationship with the European Union would lead to stronger-than-expected economic growth,” it said.

British Prime Minister Theresa May is trying to bridge a divide in her Conservative Party over how many concessions she should make to the EU which, in return, will determine how much access Britain gets to the EU’s markets.

May has ruled out staying in the bloc’s single market and its customs union because Brussels would demand concessions that she is not prepared to offer, such as the continued free movement of workers to Britain.

The OECD predicted Britain’s economy will grow by 1.2 percent in 2018, much weaker than growth of 2.3 percent in Germany and 1.8 percent in France but higher than the organisation’s previous forecast for Britain of 1.0 percent growth.

OECD Chief Economist Catherine Mann said the higher forecast was due to a softening of Britain’s push to cuts its budget deficit, which was announced in a budget plan last week, and to a growing likelihood of a transition Brexit deal.

The OECD said it expected growth to slow to 1.1 percent in 2019 as inflation, which jumped after the Brexit vote, pinches households and business investment contracts, leaving exports as the main engine of growth.

The OECD’s forecasts were weaker than growth projections of 1.4 and 1.3 percent for 2018 and 2019 announced last week by Britain’s official budget forecasters.

The OECD also repeated a warning that a sharp rise in high consumer debt, coupled with stagnant household incomes, was a major risk in Britain and said caps on how much households could borrow based on their incomes would bolster financial stability.

Additional reporting by Leigh Thomas in Paris; Writing by William Schomberg

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