Keep close to EU or face long term decline: OECD warns UK

The thinktank to the world's richest nations, which has predicted the UK's growth rate will fall to just 1% next year, said a "disorderly" exit from the EU single market and customs union in 2019 "would hurt trading relationships and reduce long-term growth".

But the report said that the reversal of the Brexit decision by a change of government or a second referendum would have a "significant" positive impact on the UK's growth.

Entering the debate over Brexit at a crucial stage in negotiations, the OECD added that steep falls in the UK's productivity performance relative to other major economies allied with the failure of its export industries to grab a slice of expanding world trade have left it in a weak position to operate outside the EU.

The warning follows a week of shuttle diplomacy between London and Brussels. The UK government says it has gained a commitment from EU leaders to speed up talks, although there has been no progress in crucial areas, including the divorce bill.

EU leaders have made it clear that agreements on the divorce bill, the border with Northern Ireland and the rights of EU citizens living in the UK need to be reached before they are prepared to discuss a trade deal. With time running short before the March 2019 deadline, the OECD said it was likely that the loss of "frictionless trade with the EU would prove damaging to the economy's health".

Officials at the OECD have adopted one of the gloomiest outlooks for the UK in their annual health check of the British economy with an assumption that a trade deal with the EU would take four years to negotiate following Brexit, leading to further uncertainty and lower growth.

"In the absence of a free-trade agreement in 2019, switching to World Trade Organisation (WTO) rules would cut UK growth by 1.5 percentage point that year. This assumption underpins the projections in this survey, given the large uncertainty about the outcome of negotiations," it said.

The UK should eventually conclude a free trade deal with the European Union by 2023, it predicts.

"However, putting in place a transition period of a few years after 2019 during which most of current trade arrangements with the European Union would be maintained until a new agreement is found would reduce the economic consequences in the run-up to Brexit and right after."

To offset some of the damage, the OECD urged the British chancellor, Philip Hammond, to spend spare funds on identifying ways to improve productivity.