A no-deal Brexit scenario could cause a deep recession, rise in unemployment and further sterling devaluation
In a scenario analysis of the Brexit economic risks, the Bank of England and the UK Treasury said Prime Minister Theresa May’s deal is the best prospect for the country. It has a transition period and the trading relationship is likely to be relatively close to the Common market,
The Bank of England (BOE) and UK Treasury have stated in no uncertain terms that a crash out from the European Union (EU) could cause a deep recession, a rise in unemployment, further sterling devaluation and higher inflation.
All Brexit economic scenarios, including Mrs May’s deal, would have a negative impact on growth in the coming five years. The forecasts are similar to the negative predictions of the OECD and IMF.
MPs such as former Brexit Secretary David Davis and Brexiteer Jacob Rees Mogg claimed that the BOE and Treasury were pursuing similar “project fear” forecasts to those ahead of the 2016 referendum.
Those forecasts turned out to be too pessimistic. What the Brexiteer MPs did not admit, however, was that the BOE pumped money into the economy after the referendum and the subsequent steep pound devaluation boosted the economy, albeit at the expense of higher inflation.
Moreover, in the past few months, there has already been evidence that the uncertainty has contributed to slower growth, lower productivity, factory job losses, declining property prices, a sliding pound and a weaker stock market.
Applying several scenarios, the BOE and Treasury showed the costs of leaving the EU, by far the UK’s biggest regional market. The bank found that a deal that has the closest goods and services trade and investment relationship with the EU’s common market could bring about a rise of 1.5 per cent in the gross domestic product (GDP) in the coming five years.
In an uncontrolled crash out, the economy could experience a worse recession than in 2009. It could shrink by 8 per cent within a year or two and short- and long-term interest rates could rise to 5.5 per cent with house and apartment prices tumbling by up to 30 per cent. The BOE has calculated through stress tests that banks could survive such a downturn but it is likely to ease money considerably, causing a steep pound devaluation that could help steady the economy.
The Treasury’s forecasts were also pessimistic, fearing that a no-deal scenario would cause the UK economy to be 10.7 per cent smaller and that even Mrs May’s deal implied that the economy’s growth would be dented by 3.1 per cent in five years. Several economists, including Nobel prize winner Paul Krugman, and Andrew Sentence, a former member of the BOE’s monetary policy committee, criticised the more extreme forecasts.
The BOE said that the model’s assumption considered established empirical economic relationships, for instance, barriers that result in economies becoming less open. The result is lower trade and foreign direct investment, that tends to reduce productivity. A depreciating currency and tariffs raise inflation , tighten financial conditions and raise interest rates. An increase in uncertainty also leads to weaker demand and higher unemployment.
A range of BOE evidence suggested that the impact of introducing friction such as tariffs and customs checks at the border, hurts businesses and the economy swiftly. A substantial number of firms have little experience with customs checks and, for many, their supply chain management could be significantly disrupted by delays at the border.
The BOE found that companies are generally not yet well equipped to cope in the event of the UK leaving the EU without a transition period. The City’s financial sector, a massive exporter of the UK, will also be damaged.
MPs will do the nation a great disservice if they don’t listen to constituents
The forecasts, as well as appeals from numerous businesses, trade unions and voter polls across the UK, are likely to pile considerable pressure on errant MPs. They will need to listen to their constituents and vote for Mrs May’s Brexit deal, the least bad option.
Andrea Leadsome, a Brexiteer, who is Leader of the House of Commons, said that despite her reservations, she would be backing Mrs May’s withdrawal agreement.
A Daily Mail/Survation poll two days prior to the BOE and Treasury economic warnings showed that 41 per cent of voters back Mrs May’s deal against 38 per cent who do not. Replying to the question that her agreement is not ideal, but is the best on offer, 52 per cent favoured it and only 19 per cent rejected it.
Asking Tory voters only if MPs should back Mrs May, 62 per cent replied yes. Almost half of the respondents – 48 per cent – wanted a “People’s Vote on Mrs May’s deal”.
© Copyright Neil Behrmann
This editorial was first published in The Business Times, Singapore
Neil Behrmann is London correspondent of The Business Times. Jack of Diamonds his thriller on global diamond mining and smuggling, has recently been published. It is the sequel to the thriller, Trader Jack, The Story of Jack Miner.
See reviews of both books on: https://www.amazon.co.uk/Neil-Behrmann/e/B005HA9E3M