Brexit impact on economy to be less harsh than anticipated

Bloomberg

Brexit is going to cause the British economy to slow less than originally thought, according to the OECD. The Paris-based Organization for Economic Cooperation and Development revised up its UK growth forecasts to 2 percent from 1.8 percent this year, and to 1.2 percent from 1 percent in 2017, according to its November Economic Outlook. An inflation-induced pinch on consumer spending and lower investment are likely to drive the slowdown, it said, and those threats could prove more troublesome than expected.
“The unpredictability of the exit process from the European Union is a major downside risk,” the organization said Monday. “Uncertainty could hamper domestic and foreign investment more than projected and the pass-through of currency depreciation to prices could be larger, deepening the extent of stagflation.”
While the forecasts assume the UK obtains “most favored nation” status under World Trade Organization rules after quitting the EU in 2019, they underscore the uncertainty surrounding the outcome of negotiations. The debate over the shape of Brexit gained further steam over the weekend, with Bank of England Governor Mark Carney reportedly telling bankers there should be a “buffer” period to give companies time to adjust to the UK leaving the bloc.
The BOE and OECD have been among the institutions criticized by pro-Brexit politicians for over-exaggerating the economic impact of the referendum. Even after revising up its growth outlook, the OECD is gloomier about next year than the central bank and the Office for Budget Responsibility, the independent fiscal watchdog that published forecasts last week.
The OECD forecasts the unemployment rate rising to 5 percent next year and to 5.6 percent in 2018.
The depreciation in the exchange rate should help to boost exp-
orts and higher spending on labor market policies could enhance productivity, it said.

FASTER INFLATION
The OECD predicts the economy will expand at a 1 percent pace in 2018, with inflation picking up to 2.4 percent in 2017 and almost 3 percent in 2018.
While price growth is expected to exceed the BOE’s 2 percent target, policy makers should maintain monetary stimulus to “ease the cost of economic adjustment to the departure” from the EU, it said. BOE officials have said that their tolerance to above-target inflation is “limited.”
Prime Minister Theresa May has pledged to start formal divorce talks by the end of March 2017, and there’s no clarity yet on exactly what form of trade relationship with the single market the government is attempting to pursue. “Improved prospects of an orderly exit from the European Union while retaining strong trade linkages with the bloc would support near-term growth more than projected,” the OECD said.

‘SINGLE MARKET SHOULD BE AT HEART OF BREXIT PLAN’
Keeping membership of the European single market should be at the core of Britain’s plan for Brexit, according to a cross-party group of senior lawmakers who campaigned to remain in the European Union.
A departure from both the EU and its single market, coupled with a free-trade agreement that prioritized only some industries, would damage the British economy because “every major sector is linked to the EU single market and could be harmed,” according to research for the group, Open Britain, conducted by the Centre for Economics and Business Research. Cherry-picking is made difficult by the linkages between industry sectors, it said.
“Every major sector of our economy is linked to the single market and could be harmed through an arrangement that prioritizes one sector over another,” the opposition Labour Party’s former business spokesman, Chuka Umunna, will say in a speech on Monday, according to Open Britain. “The benefits we have within the single market cannot be replicated outside it without cost, since every alternative inevitably means increased barriers to trade.”
Politicians from all parties who backed “Remain” in the referendum in June have largely accepted the verdict of the public, and many are now trying to ensure that Brexit is carried out in a way that retains as close a link to the EU as possible. Prime Minister Theresa May has signaled immigration controls are a priority of her strategy, with her European counterparts suggesting that stance is incompatible with staying in the single market.
“There is no mandate for one particular Brexit option,” former Business Minister Anna Soubry, a Conservative, is due to say. “The only question on the ballot paper was whether to leave, which we will,
but how we execute our extraction must be debated.”