Brexit deal will deliver bigger boost for economy

Directors & Brexit

Leaving the EU with a deal would boost the UK economy more than expected, according to an analysis that warns of starkly different outlooks depending on the outcome of Brexit talks.

The economy will grow by 1.5 per cent in 2020 in the event of a deal and the pound could rise by as much as 15 per cent, the latest quarterly economic outlook report by KPMG says.

The accountancy firm had previously forecast that the economy would grow by 1.3 per cent, but said that the labour market was performing well and that consumer spending remained robust.

However, the report warns that Britain could face a year-long recession in the event of a no-deal Brexit, with the economy contracting by 1.5 per cent.

The latest report highlights the divergent paths being predicted for the UK economy depending on the outcome of Brexit negotiations in Westminster and Brussels.

In separate research by the Resolution Foundation, the think tank, warned that the UK is poorly equipped to deal with a slowdown. It said that historically low interest rates have restricted the central bank’s ability to use monetary policy to stimulate the economy and therefore the next downturn is likely to be more painful as a result.

Fears about the health of the country’s economy have grown since GDP shrank for the first time in seven years in the three months to June. Output fell by 0.7 per cent, down from growth of 0.5 per cent in the first three months of the year.

Economists described the figures as a “rude awakening” from the first quarter of the year, when Brexit-related stockpiling lifted growth. They noted that a disruptive Brexit combined with a slowdown in global growth could further dampen growth.

The most recent contraction in GDP leaves the annual growth rate at 1.2 per cent, smaller than the 1.3 per cent forecast by the Bank of England in its latest inflation report. The bank said this month that there was a one-in-three chance of a recession within six months.

KPMG said that a no-deal Brexit could significantly dent exports next year because of delays at the border and confusion over regulation. “While both the Bank of England and the UK government would be likely to offer monetary and fiscal policy support, their headroom for action is limited,” it said. Potential shortages of imported food and medicines also threaten to undermine consumer confidence.

A separate report published today concluded that the country would probably fall into recession in the coming months. “Although there is some doubt as to the exact timing of the appearance of recession . . . it now seems improbable that a UK recession can be avoided over the next nine months,” researchers at the Centre for Economics and Business Research said.

There are also signs that confidence in Britain’s dominant services sector is faltering as the prospect of a no-deal Brexit grows. The BDO Services Optimism index fell by 3.89 points to 95.4 in August, the lowest level since 2013 and just above the 95 level that indicates a recessionary mindset. Low confidence indicates that businesses are likely to cut investment and hiring, and BDO said that fall was “very worrying”. It said it indicated that the businesses were reining in spending because of concerns about a no-deal Brexit.

Yael Selfin, chief economist at KPMG, said that the UK economy was at a “crossroads”. She added: “It is difficult to think of another time when the UK has been on the verge of two economic outturns that are so different, but the impact of a no-deal Brexit should not be underestimated.

“Despite headwinds such as the slowing global economy and limited domestic capacity, the UK economy now has the potential to strengthen over the next 12 months. But a no-deal Brexit could put paid to this upside, triggering the UK’s first recession for a decade.”