The Paris-based think-tank also said that maintaining close ties with the EU and implementing policies to improve productivity would be “crucial for maintaining future living standards”.
The OECD Economic Survey of the United Kingdom warned that “no deal” would result in low investments, the pound hitting new lows and a credit rating cut.
OECD’s secretary general Angel Gurria said: “The United Kingdom is facing challenging times, with Brexit creating serious economic uncertainties that could stifle growth for years to come.
“Maintaining the closest economic relationship with the European Union will be absolutely key, for the trade of goods and services as well as the movement of labour.”
Chancellor Philip Hammond said the UK would consider the report and act where possible.
He said: “[By] delivering a time-limited transition period, avoiding a disruptive cliff-edge exit from the EU, we can provide greater certainty for businesses up and down the UK, and across the European Union.”
The report highlighted the growing uncertainties and number of risks as a result of last summer’s vote to leave the EU.
Gurria added: “Macroeconomic and fiscal policy can and should continue being used to support the economy, both during and after the exit negotiations.
“Future prosperity will depend on new reforms to improve job quality, boost labour productivity and ensure that the benefits are shared by all.”
Sustained economic progress will also rely on the outcome of Brexit negotiations with the EU and other countries, the OECD said.
The report provided a range of policy options to meet the challenges posed by Brexit.
It highlighted the need to enhance job security and the issue of zero-hour contracts as well as the need for tax and spending reviews, such as the potential for higher National Income taxes for self-employed and indexation of state pensions on average earnings.
It also suggests the government address the regional productivity divide between high-productivity areas like London and southern England, and lower-productivity northern regions as a “key channel to fostering long-term growth”.
A government statement for the Treasury said: “‘We are working to achieve the best deal with the EU that protects jobs and the economy.
“We are leaving the EU and there will not be a second referendum.”
