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The Globe and Mail

Brexit uncertainty deepens as agency shares grim economic outlook

Britain's Chancellor of the Exchequer Philip Hammond speaks in Birmingham, England in 2016. Britain and the EU began negotiations on a future relationship last March, and little has been accomplished.

Joe Giddens/AP

Britain's future outside the European Union is looking a lot less rosy as the economy slows, Brexit talks stall and the government lurches from crisis to crisis.

The picture got gloomier on Wednesday, when an independent government finance agency slashed its outlook for the country's economy in each of the next five years and said productivity will deteriorate as well, remaining at a 10-year low. It was the biggest downgrade in the history of the agency, the Office for Budget Responsibility, which also signalled that the country faces much more uncertainty after Britain formally leaves the EU in March, 2019.

The dire warnings were released a few hours after Philip Hammond, the Chancellor of the Exchequer, unveiled the Conservative government's annual budget. Mr. Hammond put a better spin on the outlook, saying the country "has a bright future," and adding that the Tories are laying a solid platform for Brexit. "In this budget, we express our resolve to look forwards not backwards; to embrace that change, to meet those challenges head on and to seize those opportunities for Britain," he told the House of Commons.

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The budget contained a host of new spending measures, from increased support for the health service to plans for more public housing, as well proposals to help people buying their first home. Mr. Hammond also set aside £3-billion ($5-billion) over the next two years for Brexit preparations.

So far, the Brexit process has been a quagmire. Britain and the EU began negotiations on a future relationship last March, and little has been accomplished. The talks have stalled mainly over how much Britain must pay to settle EU financial commitments such as pension obligations and some ongoing program budgets. Some estimates put the figure as high as €60-billion (or $90-billion).

Britain has offered to pay just €22-billion. Prime Minister Theresa May said this week that she is prepared to increase that amount, although she did not indicate by how much. She is eager to move on to trade talks, but the EU's chief negotiator, Michel Barnier, has insisted he will not discuss a trade agreement until the financial issue is resolved. And he has given Ms. May two weeks to come up with a figure. EU leaders are to meet on Dec. 14 and 15 to decide whether sufficient progress has been made for trade talks to begin.

Ms. May is also under pressure at home, with infighting among cabinet ministers, and scandals that have forced two ministers to resign. Calls have also been growing within the Conservative Party caucus for Ms. May to step down. And if that was not enough, political turmoil in Germany, with Chancellor Angela Merkel facing a possible election, could also affect the Brexit process and delay EU decision-making.

Amid all of that, the British economy has soured in recent months, with business investment slowing over concerns about the government's handling of Brexit.

This week, the head of Airbus's British operations told a parliamentary committee the company could move some of its British wing-building production elsewhere. "I need to let you know, committee, that other countries would dearly love to design and build wings," said Katherine Bennett. "Some of them already do; we do build wings in China now, and believe you me, they are knocking at the door as a result of the situation we are in in this country."

Wednesday's report from the OBR raised more concerns. Productivity, which is the amount of output produced per hour worked, has been a concern for years in Britain and several other western countries. From the end of the Second World War until the start of the financial crisis in 2008, productivity increased by about 2 per cent annually. Higher productivity is crucial because it boosts company profits and brings higher wages and more tax revenue for governments. However, productivity in Britain has essentially flat-lined since 2008, rising by 0.1 per cent on average annually.

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The OBR said that trend will not end soon. It cut its average annual productivity growth forecast for the next five years from 1.7 per cent to less than 1 per cent. That led the agency to lower its forecast for economic growth this year from 2 per cent to 1.5 per cent and make similar reductions in each year up to 2021. And it could get worse. The agency said it has no idea how Brexit will affect the forecast. "Given the uncertainty regarding how the government will respond to the choices and tradeoffs it faces during the [Brexit] negotiations, we still have no meaningful basis on which to form a judgment as to their final outcome," it said.

"According to the OBR, it will be 2022 until we are outpacing the [euro zone]," said a report from economists at the Royal Bank of Scotland. "All sobering stuff. And it hung over the entire budget, limiting the Chancellor's room for manoeuvre."

Mr. Hammond promised to address productivity by increasing spending on new technology programs, high-speed railways, infrastructure and education with particular emphasis on mathematics.

British Prime Minister Theresa May has sent a letter to the President of the EU Council which sets in motion what could be a two-year long journey when Brexit could be considered final
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