No-deal Brexit to plunge UK into year-long recession, warns fiscal watchdog

UK output falls by almost 2% under the least-worst no-deal Brexit scenario, said the watchdog

A no-deal Brexit could plunge the British economy into a yearlong recession, hammer the pound and house prices and add tens of billions of pounds to government borrowing, according to the UK fiscal watchdog.

The Office for Budget Responsibility analysis is based on the “less disruptive” of two no-deal Brexit scenarios modeled by the International Monetary Fund in April.

Brexit Blow

UK output falls by almost 2% under the least-worst no-deal Brexit scenario.

“Heightened uncertainty and declining confidence deter investment, while higher trade barriers with the EU weigh on exports,” the OBR said in its fiscal risks report published Thursday. “Together, these push the economy into recession, with asset prices and the pound falling sharply.”

The assessment comes as the two candidates vying to be prime minister harden their rhetoric around a no-deal Brexit, with both Boris Johnson and Jeremy Hunt saying they’d be prepared to let Britain crash out of the EU on Oct. 31 if renegotiating the withdrawal agreement proves impossible.

Fears of a no-deal Brexit sent sterling to its lowest level against the dollar in more than two years this week and pushed up the cost of insuring British debt against default.

“Brexit risks are more prominent than they were two years ago with no deal being countenanced at the highest levels, amid considerable uncertainty about what that would mean in practice,” OBR Chairman Robert Chote told a press conference in London.

‘Significant Hit’

Chancellor Philip Hammond said the OBR report showed that even the most benign no-deal Brexit, with limited border disruptions, would deliver a “very significant hit” to the UK economy, warning the consequences could be much worse if those pursuing the cleanest of breaks with the European Union are successful.

“I greatly fear the impact on our economy and our public finances of the kind of no-deal Brexit that is realistically being discussed now,” Hammond said in Chantilly, France, where is meeting Group of Seven finance ministers.

A worst-case scenario presented by the Bank of England last November calculated the economy could shrink as much as 8% in a slump deeper than that of 2008-09.

The projections included in the OBR stress test see:

• GDP falling by 2% by the end of 2020, leaving it 4% below OBR March forecast

• Recession lasts for four quarters, beginning in the final three months of 2019. Output shrinks 2.1% over the period, a third of that experienced during the financial crisis a decade ago. BOE responds by cutting interest rates to about 0.2% by the end of 2020

• The pound falls 10% immediately, equity prices drop 5% but gilt yields decline. House prices plunge 10% between the start of 2019 and mid-2021

• Output falls 1.4% in 2020 alone, with business investment plunging 8%, house prices dropping 5.9% and average earnings growing 1.6% -- half their current pace. Weaker pound pushes inflation above 2% target and productivity per hour declines

• Borrowing is around 30 billion pounds ($37 billion) a year higher than March forecast from 2020-21, with the loss of tax receipts explaining most of the deterioration. Projections assume no additional fiscal stimulus to aid the economy

• Government debt is 12% of GDP higher than March forecast by 2023-24 at over 85% of output, climbing above 2 trillion pounds for the first time

• Near-term fiscal mandate is met with a smaller margin but hopes of balancing the budget by the mid-2020s are further out of reach, with the deficit rising to almost 40 billion pounds by 2023-24. Deficit tops 51 billion pounds in 2020-21, or 2.3% of GDP