09 December 2018

Financial Times: A disruptive Brexit will make recession hard to avoid, say economists

The UK would struggle to avoid a recession next year if it crashes out of the EU, but the severity of any downturn would depend on political choices in Brussels that could ease the fallout, according to economists.

If MPs reject Prime Minister Theresa May’s compromise Brexit deal in a crunch vote at the House of Commons currently scheduled for Tuesday, Britain risks leaving the EU without a divorce agreement, and several economists said they agreed with chancellor Philip Hammond’s statement last week that a no-deal Brexit would be a “terrible outcome for the economy”.

But none saw the likely impact anything as serious as the “disorderly” Brexit scenario outlined last month by the Bank of England — in which the UK economy shrinks 8 per cent in 2019, and interest rates rise to 5 per cent to protect the pound and guard against rampant inflation.

Any Commons rejection of the prime minister’s withdrawal agreement is likely to be followed by doomsday warnings by the UK government and Brussels about the consequences of a no-deal Brexit, in an effort to push MPs to back her plan in a second vote.

Many economists have refrained from putting any numbers on the likely economic impact of the UK crashing out of the EU without an agreement on March 29, partly because of uncertainty about the precise nature of the exit.

Capital Economics estimated a disruptive no-deal Brexit, where the UK and the EU do not co-operate, could knock 3 per cent off Britain’s national income by 2020 “with an outright recession probable”.

However, it said that in a “managed” no-deal scenario — where the two sides seek to minimise disruption in key areas, for example by agreeing arrangements to enable flights between the UK and mainland Europe — would only involve a pause in economic growth next year and a 1 per cent hit to gross domestic product by 2020.

Oxford Economics estimated that in this managed scenario the economy would “flirt with recession” in 2019 and GDP would be 2 per cent lower than its current baseline forecast by 2020.

But while many other economists are reluctant to calculate the impact of the UK crashing out of the EU, several said the BoE’s modelling of a “disruptive” no-deal Brexit offered a better guide than its worst case “disorderly” scenario. [...]

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