UK Economy Could Take 10.7% Economic Hit with No-Deal Brexit: Gov’t Report

By and | November 28, 2018

The U.K. will suffer a major economic hit if Parliament rejects Theresa May’s Brexit deal and the country crashes out of the European Union with no new trade arrangements in place, according to official analysis.

A government report on Wednesday said GDP will be as much as 10.7 percent lower over 15 years if there’s no orderly exit and the supply of workers from the bloc dries up. The U.K. will be poorer under all exit options modeled in the study.

While the new analysis paints a dire picture of the worst-case scenario, it does not provide a clear picture of the economic impact of the deal May finalized with the EU last week. Instead, it offers an analysis based loosely on a plan that’s already been rejected by the bloc.

The omission of May’s agreement is likely to be politically awkward for the government, because the numbers are intended to help inform politicians before they vote on whether to accept or reject the deal May has negotiated.

It also underlines the uncertainty facing Britain with just four months before it’s due to leave the world’s largest trading bloc. Even officials working in the heart of government cannot calculate the impact it will have on the economy with any real certainty.

“Our deal is the best deal available for jobs and our economy,” May told Parliament.

If Parliament rejects May’s deal, the U.K. will be on course to crash out of the EU on March 29 into a legal limbo, with no special rules in place to regulate trade with the bloc. Backers of May’s deal hope the findings in the analysis will bring wavering politicians — especially Conservative rebels — into line.

Chancellor Philip Hammond said Wednesday staying in the EU is the best outcome for the economy, but the economy isn’t the only consideration for people who want to leave.

Additional findings of the report are:

  • May’s “Chequers” plan for close ties to the bloc, which the EU rejected, is the best scenario.
  • GDP would be 0.6 percent lower over 15 years, or 2.5 percent if EU net migration fell to zero
  • The trade deal won’t be negotiated until after Brexit day, so economists can’t model it. Instead, they take a halfway point between May’s ideal plan and a regular free-trade agreement. In that scenario, GDP would be 2.1 percent lower over 15 years, or 3.9 percent if EU migration stopped.
  • The northeast of England, which strongly backed leaving the EU, would be the region worst hit by a no-deal Brexit.
  • Reducing net immigration from the EU to the U.K. would worsen the economic hit from any kind of Brexit.
  • The worst-case hit from a no-deal Brexit amounts to about 200 billion pounds ($256 billion), or more than 3,000 pounds per person Brexit could mean extra 119 billion pounds of government borrowing by 2035-36.
  • Manufacturing would take heaviest hit in a no-deal scenario The scenarios compare the outcomes against a baseline of remaining in the bloc

The analysis is almost certain to provoke a backlash from Tory Brexiteers, who say predictions of economic damage are part of “Project Fear” and insist a no-deal Brexit would leave Britain better off.

They point to Treasury analysis published before the 2016 referendum that warned of a possible recession within two years and a significant rise in unemployment. As it turned out, unemployment is at a four-decade low and the economy has recorded continued growth, though there is little dispute that investment and consumer spending have been adversely affected by Brexit.

“If ministers spent time preparing for a no-deal scenario, rather than dreaming up silly scare stories, we could all make a success of our post-Brexit future,” said Priti Patel, a former minister in May’s government and a leading Brexiteer.

Heading for Defeat

May appears to be heading for defeat in the Parliamentary vote on whether or not to back her deal, which will be held on Dec. 11, amid massive opposition from pro-Brexit rebels in her own Conservative Party.

The Treasury has been at pains to make clear that the analysis is a cross-government effort after arch-Brexiteer Boris Johnson privately accused Chancellor Philip Hammond’s department of being “the heart of Remain” and trying to ruin Brexit. May’s office on Tuesday said that the work is an analysis rather than an official forecast.

A risk is that the study provides ammunition to all sides in the Brexit debate, including the campaign for a second referendum to reverse Brexit and those pressing for a Norway-style option of keeping close economic ties.

The Bank of England will publish its own analysis later Wednesday.

–With assistance from Fergal O’Brien, Andrew Atkinson and Zoe Schneeweiss.


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