OECD Says U.K. Would Be Better Off Keeping Close EU Links

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OECD Says U.K. Would Be Better Off Keeping Close EU Links

  • Reversing Brexit would have positive impact on economy: OECD
  • Britain faces crunch EU summit in Brussels later this week

The OECD said U.K. Prime Minister Theresa May risks doing long term-damage to the economy unless she secures a deal that maintains strong trade ties with the European Union.

The warning comes as May meets with the EU leaders in Brussels this week to try to salvage deadlocked Brexit talks. The latest impasse has pushed negotiations close to a complete breakdown, with both sides entrenched.

According to the Paris-based Organization for Economic Cooperation and Development, a disorderly exit would “hurt trading relationships, reducing long-term growth.” Among its key recommendations is maintaining the “closest possible economic relationship” with the EU. It even says that reversing Brexit would have a “significant” positive impact on growth.

That’s likely to anger pro-Brexit groups and politicians who want to fully sever ties and say Britain can thrive outside the bloc. They criticized international organizations for being too pessimistic about Brexit before last year’s referendum on EU membership.

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The OECD sees U.K. growth slowing this year and next, with expansion in 2018 of just 1 percent. The forecasts assume the nation leaves the EU with no deal and reverts to World Trade Organization rules, which would “increasingly weigh on private-sector spending.” 

Still, the group acknowledges that the outcome of the Brexit talks is “difficult to foresee” and they could prove more favorable than assumed. But this would mean an “ambitious EU-U.K. agreement and a transition period to allow for adjustment.”

The 140-page OECD report also says there’s a need to improve productivity. Highlighting regional disparities, it pinned part of the blame on low investment in areas such as transport. The U.K. Treasury said in response that boosting productivity is a “key priority.”

On the Bank of England, the OECD says monetary policy should remain supportive, though there’s a need to remain “vigilant to signs of persistent domestic inflationary pressures.” The central bank has flagged that interest rates may need to rise in the “coming months” and markets are pricing in a high chance of a hike in November.

(Updates with additional comment in third paragraph.)