OECD cuts UK growth forecast amid Brexit fears

The OECD slashed its growth forecast for the UK economy on Wednesday, warning that a vote to leave the EU in this month's referendum would have a "substantial" impact on both the British and global economy.

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As the Confederation of British Industry (CBI) reported that private sector growth was "broadly steady" in May despite business concerns over the referendum outcome and a slowdown in global growth, the OECD cut its growth forecast for the UK this year from 2.2 to 1.7 per cent, saying Brexit fears had already undermined the economy.The organisation also warned that a Brexit would have significant impact on growth across Europe and rest of the world, and could trigger turbulence in financial markets."A decision to exit would result in considerable additional volatility in financial markets and an extended period of uncertainty about future policy developments, with substantial negative consequences for the United Kingdom, the European Union and the rest of the world," its latest economic outlook said.Meanwhile, the CBI survey of 785 companies in the manufacturing, distribution and service sectors showed the pace of growth in output was broadly similar to the previous month. Manufacturers reported a rise in output after a disappointing start to the year, while the all-important services sector showed continued growth. Retailers, however, reported falling sales in the three months to May.Rain Newton-Smith, CBI director of economics, said, “While underlying conditions for the UK economy are looking pretty stable, the risks are clear as day with uncertainty still brewing over the global outlook, and the EU vote around the corner.“Expectations for growth have slipped and are well below the levels of the last few years, with uncertainty swirling around the pace of output and the impact from risks on the horizon.“Manufacturers and consumer services are faring better with a modest growth in output, but our retailers have seen a quieter time in the quarter to May.”In a separate report, the Markit/CIPS UK manufacturing purchasing managers' index (PMI) showed a reading of 50.1 in May, up from 49.4 in April, which had marked the sector's first contraction for more than three years. Any PMI reading above 50 indicates growth.Rob Dobson, senior economist at Markit, said, "Softer global growth is weighing on new export orders. There are also signs that increased client uncertainty resulting from slower growth and the forthcoming EU referendum is weighing on investment spending."James Smith, an ING economist, believes UK growth will fall to about 0.25 per cent in the second quarter, which would represent the slowest growth rate since the end of 2012."If the UK votes to remain in the EU, we expect activity to rebound, although this may not be felt until the fourth quarter as it will take some time for corporates to form and implement fresh hiring and investment plans," he said."Conversely, if the UK leaves, the economy may see a more prolonged dip in activity, which could prompt the Bank of England to cut rates to shore up confidence in the near-term."

For more Relocate Global news and features about the implications of a vote for Brexit, visit our enterprise, UK and Europe sections.

Read more about how the UK economy is weathering seismic changes from around the world including the uncertainty over Brexit in David Sapsted’s analysis for our Spring 2016 edition.

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