UK economy facing ‘prolonged’ disruption

The UK is facing a prolonged period of disruption to economic activity as the country tackles the twin challenges of the Covid-19 crisis and leaving the EU single market, an OECD report warns

Ramping up investment in the digital economy, the service sector, green infrastructure and adult skills would strengthen the recovery and help to boost productivity and environmental sustainability for the long term, the research suggests.

OECD chief economist Laurence Boone said: ‘The combination of Covid-19 and the exit from the EU single market makes the UK outlook exceptionally uncertain.

‘Actions taken to address the pandemic and decisions made on future trading relationships will have a lasting impact on the UK’s economic trajectory for years to come, so they should be in line with long-term objectives.

‘Productivity growth in service sectors will have to accelerate significantly for the recovery to be long-lasting and sustainable.’

The report says the UK’s ‘rapid and massive’ emergency response to the pandemic has helped to steady the economy, but warns the country still faces a prolonged period of disruption to economic activity, which risks exacerbating pre-existing inequalities and regional disparities.

The survey, assuming a smooth transition to an EU free trade agreement post-Brexit, projects an unprecedented fall in GDP in 2020 of 10.1%, with activity still below its pre-crisis level by the end of 2021.

The unemployment rate is projected to be 7.1% in 2021, up from 3.8% in 2019.

The OECD says that while the increase in barriers to trade resulting from any form of exit from the EU single market will lower growth over the medium term, a disorderly exit would be more costly and disruptive.

Dealing with a no deal or unclear outcome would be complicated by the fact that firms have diverted their attention to dealing with Covid-19, and those with reduced earnings will be less able to invest in new systems, staff and training.

The report calls for the UK to spend more on digital infrastructure, where it is performing below other EU countries, and to improve digital skills, pointing out that the low level of adult training in the UK is a concern.

Responding to the survey a Treasury spokesperson said: ‘We welcome the OECD’s survey, their recommendations and their recognition of our unprecedented package of support which has protected jobs, businesses and the wider economy throughout the pandemic.

‘As the OECD note in their report, it’s clear that policy action has mitigated the economic impact of the virus.

‘The recent measures announced by the Chancellor, including the Plan for Jobs and the Winter Economy Plan, strike the right balance between protecting jobs and providing people with new training and opportunities, including through traineeships, apprenticeships and our £2bn Kickstart scheme, to ensure that nobody is left without hope.’

Useful links:

OECD economic survey of the UK

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