OECD warns of Brexit 'negative shock'

The UK's economy would suffer "a large negative shock" if it left the EU, the Organisation for Economic Co-operation and Development said.

By 2020, GDP in the UK could be more than 3% below the level it might otherwise have been if it had remained in the EU, the think tank said.

In the rest of the EU, GDP would be about 1% weaker as a result, it said.

John Longworth, chair of the Vote Leave Business Council, said the report was flawed.

EU impact

The OECD said lower trade openness would hit the UK's economic dynamism and productivity in the long term as well.

"The weaker UK economy, as well as possible new restrictions after exit from the European Union, would lower net migration inflows, adding to the supply-side challenges by reducing the size of the labour force," it said in its latest economic outlook.

"Some of these effects could be offset by reductions in domestic regulatory burdens, but the overall net effect on living standards would be strongly negative. By 2030, UK GDP could be over 5% lower than otherwise if exit had not occurred."

The OECD said that the impact of a Leave vote would not be merely confined to the EU, which warned of "substantial negative consequences for the United Kingdom, the European Union and the rest of the world".

"Weaker demand in the European economies also adversely affects the rest of the world, with GDP in the Brics and other non-OECD economies lowered by over half a percentage point by 2018," the OECD said.

"Within these groups, Turkey and Russia are relatively heavily hit, reflecting their comparatively strong trade linkages with the European economies."

Analysis: Andrew Walker, economics correspondent

In the OECD's analysis, which is of course vigorously contested by Leave supporters, it's not just Britain that would pay an economic price in the event of a vote to exit. By 2020, economic activity in the rest of the European Union would be 1% lower than it would otherwise have been - not lower than it is now, but it would grow less.

That is a significant impact, if it's right, though only a third as large as what the OECD predicts for the UK's own economy. Part of the predicted damage inflicted on the rest of the EU is due to a fall in sterling - which for the UK itself, actually cushions the shock.

A Leave vote could also reinforce uncertainty about the future of the EU and the single market, leading to more difficult financial conditions in other European countries.

The OECD identifies three countries that are especially exposed to the UK economy - Ireland, the Netherlands and Luxembourg. It also points to two European, but non-EU nations which have strong links - Norway and Switzerland.

The OECD downgraded its forecast for UK growth this year to 1.7%, from the 2.2% that it predicted in February. This forecast assumes that the country will remain in the EU.

Chancellor George Osborne welcomed the report, saying: "While the Leave campaign indulges in the fantasy politics of uncosted and unworkable proposals, in the real world we have had today another wake-up call of the grim economic consequences of leaving the EU and the single market.

"The highly respected, independent OECD has significantly downgraded Britain's growth today because of uncertainty about the outcome of the referendum, and they are clear that is just a taste of worse to come if Britain leaves the EU."

John Longworth, chair of the Vote Leave Business Council, said the OECD report found that the UK economy would continue to grow if there was a vote to leave the EU.

"But this is a flawed report that makes assumptions which have been roundly dismissed by senior economists," he added.

'Low-growth trap'

In its wider assessment of the global economy, the OECD said that eight years after the financial crisis, "the recovery remains disappointingly weak".

It forecast global GDP growth of 3% in 2016, unchanged from last year, with "only a modest improvement foreseen in 2017", while global trade growth remained "subdued".

"Many emerging market economies have lost momentum, with sharp downturns in some, especially commodity producers," the OECD said.

"The upturn in the advanced economies remains modest, with growth held back by slow wage gains and subdued investment," said the report.

"All this culminates in growth rates much weaker than anticipated a few years ago and well below pre-crisis norms."

The OECD said the global economy was stuck in a "low-growth trap" which required collective action and structural reforms.

"It is clear that reliance on monetary policy alone has failed to deliver satisfactory growth and inflation," it said, adding that "almost all countries have scope to reallocate public spending towards more growth-friendly items".