UK could slide into recession if it crashes out of the EU- OECD

Given that the polls are now behind Prime Minister Theresa May and Brexitiers are in disarray, Parliament may eventually vote for an amended deal.  Despite that, Brexitiers and the Labour Party could precipitate a no deal crash.

The Organisation For Economic Cooperation and Development (OECD) states that Brexit uncertainty has already contributed to a decline in UK growth from 1.8 per cent in 2016 to 1.7 per cent in 2017 and a projected 1.4 per cent in 2018. If Parliament accepts Mrs May’s deal, growth could pick up to 1.9 per cent in 2019, but then fall to 1.1 per cent in 2020.

In the event of no deal, at least 2 per cent or 38 billion pounds ($49 bn) would be wiped off the UK’s gross domestic product (GDP) in the coming two years. Since inflation is forecast to rise from the current 2.4 per cent, a crash out would thus cause an inflationary recession, the OECD predicts.

“A failure to come to a withdrawal agreement with the European Union is by far the greatest risk in the short term,” the OECD says in its latest World Economic Outlook which also predicts a global economic slowdown. ”

Leaked deal

The pound jumped following leaks of a 26-page document saying that an EU UK deal would be an “ambitious, broad, deep and flexible” partnership. The draft deal covers trade, law enforcement, criminal justice, foreign policy, security and defence, while the relationship will be based on ‘rights and obligations’. The document also stresses that EU free movement will end in the UK after Brexit, allowing the Home Office to choose skilled people from all nations, Mrs May said.

Pound rallies against euro

More details needed

The OECD, however, stresses that nations and businesses require more details on the future relationship between the UK and the EU. It warns that “the extension of the transition period, and the resulting uncertainties, could incite businesses to delay investment plans further. By contrast, prospects of maintaining the closest possible economic relationship with the EU would lead to stronger than expected economic growth.”

If there is a deal, growth is projected to increase slightly in 2019 before slowing in 2020, on the assumption that there is a smooth exit from the EU, states the OECD. The low growth, higher inflation stagflation deal outlook, is the result of Brexit-related uncertainties about future trading arrangements.

Pound hovering near lows against Singapore dollar

Hobson’s Choice-  Stagflation or Recession

In short, the Brexit mess, worsened by parliamentary divisions, has brought about the choice of a weak stagflation economy if there is a deal, or an inflationary recession if the UK crashes out.

“Both private consumption and investment growth have slowed markedly since 2016, reflecting uncertainties and a decline in households’ purchasing power,” says the OECD. “House price inflation has slowed since the start of 2016, although the weakness remains concentrated in London. After two years of buoyant export growth, boosted by the post-referendum (currency) depreciation, exports of goods and services have fallen sharply since the beginning of this year.”

An expansionary fiscal stance and a forecast “slow recovery in exports” are expected to support growth, while the monetary stimulus will be gradually withdrawn.  But fiscal spending is expected to peak in 2019, hence the OECD’s prediction that growth within a Brexit deal will slide again in 2020.

The OECD warns that the authorities should stand ready to respond further if demand weakens significantly as a result of Brexit. Temporary monetary and other measures would also be needed to cushion the economy and support displaced workers in the event of a no-deal exit. The preferred Brexit option is an agreement that will ensure the closest possible trading relationship with the EU, says the OECD. There should also be good overseas access for financial services.

© Copyright Neil Behrmann

 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.

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