BRITAIN’S economy is set to slow down rapidly next year as the country approaches Brexit, the OECD has forecast.

Sir Vince Cable, the Liberal Democrat leader, also pointing to a fall in business optimism, warned: “Brexit is set to turn Britain into the sick man of Europe again.”

The Paris-based think-tank predicted growth of just 1.6 per cent for this year, slipping further to just one per cent in 2018, which would mean the UK would have the slowest growing economy among the G7 leading industrialised nations. Germany, France and Italy are set to have growth rates of 2.1 per cent, 1.6 and 1.2 respectively.

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The OECD noted how interest rate setters faced a "difficult balancing act" amid the threat of a potential housing market correction and risks to the wider economy from raising borrowing costs.

It warned the UK was among a number of economies where sky-high house prices meant rate hikes could have worrying side-effects after years of rock-bottom borrowing costs.

Its comments come after the Bank of England signalled last week that a rate rise might be needed in the "coming months" to ease surging inflation caused by the Brexit-hit pound.

The pound hit its highest level against the US dollar since the Brexit vote after last week's minutes of the Bank's September rates meeting hinted a rise could be on the cards as soon as November, although Governor Mark Carney stressed in a speech on Monday that any increases would be gradual and limited.

In its interim economic outlook report, the OECD said: "Authorities face a difficult balancing act in continuing to provide support while managing financial stability risks.

"In some advanced economies, including Australia, Canada, Sweden and the United Kingdom, house prices are elevated relative to rents, raising financial stability risks if rising interest rates were to trigger a housing market correction."

Rates have been at historically low levels in a number of economies, standing at 0.25 per cent in the UK, where rates have not risen for more than 10 years.

"The long period of low interest rates has boosted asset price valuations and created financial distortions that will be testing to resolve," the OECD said.

Its report saw it stand by previous economic forecasts for UK GDP, predicting it to slow from 1.8 per cent to 1.6 per cent for 2017, before dropping to just one per cent next year.

It noted how "uncertainty remains over the outcome of negotiations around Brexit" and cautioned over weak real wage growth, after inflation was taken into account.

"The depreciation of sterling has modestly improved export prospects but also pushed up inflation, dampening purchasing power and private consumption.”

The OECD said the global outlook had brightened slightly since its June forecasts with GDP growth expected to increase by 3.5 per cent this year and 3.7 per cent in 2018; it had predicted growth of 3.6 per cent for 2018 at the time of its last report.

But it cautioned that "strong and sustained medium-term global growth is not yet secured", with business investment and trade still weak and wage growth "disappointing".

Wage growth has become a major focus for policymakers in the UK as households have been squeezed by Brexit-fuelled inflation and low rises in earnings.

There are fears it will lead to a sustained pull-back in consumer spending, which could hold back progress in the wider UK economy.

Labour’s John McDonnell, the Shadow Chancellor, said: "Previously, the OECD has been supportive of the Government's policy but today they reveal that productivity and wages continue to lag and the report further highlights that despite the economic crash of 10 years ago our economy is still at risk of a bubble in the housing market."

Sir Vince - noting how the OECD numbers came as a survey by the Federation of Small Businesses found the number of small businesses planning to close or downsize was the highest since records began, while optimism amongst small firms has fallen to its lowest level since the EU referendum – declared: "Brexit is set to turn Britain into the sick man of Europe again.

"One in eight small businesses now plan to close or downsize, the worst level since records began. This is economic reality, not political spin.

"Theresa May must change course from an extreme Brexit, to avoid years of lower growth and falling living standards," he added.