No-deal Brexit puts UK ‘at risk of severe downturn’

Boris Johnson

Economic growth in Britain has stalled and there is a one-in-four chance that the country is entering into a recession, according to the National Institute of Economic and Social Research.

The think tank said that the outlook was “very murky” and warned of the possibility of a “severe downturn” if Britain leaves the EU without a deal after October 31. The institute said that a no-deal Brexit would “throw concrete” in the wheels of the British economy, knocking 5 per cent off gross domestic product in the long term.

“A no-deal exit will mean a significant halt in economic activity and chronic levels of economic uncertainty,” it said. “There is around a one-in-four chance the economy is already in a technical recession.” A recession is defined as two successive quarters of falling GDP.

Niesr is Britain’s oldest independent economic research institute. Its forecasts for the British economy have performed well in recent years. Last year it ranked in the top third among a list of 30 leading forecasters, each of whom made predictions about GDP, inflation, unemployment and interest rates.

The think tank said the short-term impact of a disorderly exit could be mitigated by a cut to interest rates and more quantitative easing, but these would do little to offset the downturn in the long term. Niesr has forecast that interest rates could fall to 0.25 per cent by the end of this year but they would have to rebound to 1.75 per cent by the end of next year.

It also said the Treasury would have to jettison its fiscal rule that government borrowing should be below 2 per cent of GDP by 2020. The budget deficit would rise to 2.7 per cent of GDP in the event of no deal. Jagjit Chadha, Niesr’s director said: “However we look at it, there will not be much economic joy in a no-deal Brexit.”

The warning comes as Theresa May prepares to stand down as prime minister. Either Boris Johnson or Jeremy Hunt will succeed her. Mr Johnson, the favourite to win the Tory party leadership, has vowed to push through Brexit by October 31 “do or die”, raising expectations of a no-deal Brexit.

Even a smooth Brexit transition would unlock growth of just 1.2 per cent in 2019 and 1.1. per cent in 2020, while inflation would rise to 4.1 per cent. This is because investment and productivity growth remains weak and uncertainties about future trading relationships are likely to last beyond October. The British economy grew by 0.3 per cent in May after contracting by 0.4 per cent in April. Economists believe that second-quarter growth will fall to either zero or -0.1 per cent when the official figures are released next month.

Niesr noted that while Brexit-related uncertainty is holding back business investment and productivity, consumer spending continues to be supported by a strong labour market and sustained wage growth. According to the latest IHS Markit household finance index, consumer confidence rose for a second consecutive month, although still in negative territory, up to 44.3 in July from 43.9 in June.

Niesr’s downbeat assessment extended to the global economy. Citing trade tensions between the US and China, the think tank cut its forecasts for global economic growth to 3.3 per cent this year, the slowest annual growth for a decade.