Abu Dhabi, UAEWednesday 21 August 2019

Brexit no-deal seen shaving 1.6 points off UK growth next year

A trade accord that preserves the status quo may mean UK's economy will grow 1.9 per cent

British Prime Minister Theresa May. A no-deal Brexit will see the UK economy shrink 1.6 per cent next year. EPA/ANDY RAIN
British Prime Minister Theresa May. A no-deal Brexit will see the UK economy shrink 1.6 per cent next year. EPA/ANDY RAIN

A no-deal Brexit would mean a difference of 1.6 per centage points to UK growth next year.

If Britain leaves the European Union without an agreement, reverting to World Trade Organization’s most-favored-nation status rules, the UK's gross domestic product would increase only 0.3 per cent in 2019, the National Institute of Economic and Social Research (Niesr) said on Friday.

By contrast, a trade accord that preserves most of the current arrangements would mean the economy will grow 1.9 per cent next year, more than the think tank’s previous forecast of 1.7 per cent.

A no-deal Brexit would “eliminate any fiscal space” for chancellor of the exchequer Philip Hammond, who presents his budget on October 29. While it’s possible for the government to meet its targets for the deficit and public sector net debt, it won’t be easy regardless of whether the split with the EU is hard or soft, according to Niesr’s model.

Prime Minister Theresa May is racing against time to secure an agreement with the EU before Britain formally leaves the bloc on March 29, and businesses are increasingly getting nervous about repercussions. On top of that, Ms May has vowed to end years of austerity, giving Mr Hammond a further challenge to chart a prudent fiscal path in his budget.

“The chancellor will announce the budget at a time of considerable uncertainty about the future trading relationship between the UK and EU, which also complicates the fiscal outlook,” authors including Amit Kara wrote in the Niesr report. “A no-deal Brexit will lead to a currency depreciation, lower gross domestic product in the short and long run, and higher temporary inflation.”

Under that scenario, which Niesr assumes will still be “orderly,” the chancellor will lose almost all his headroom to borrow the additional 30 billion pounds (Dh141bn) he needs to meet spending promises. Even if the government complies with its fiscal mandate under a soft Brexit scenario, it will still not meet the medium-term target of balancing the budget without raising taxes, according to the think tank.

Updated: October 26, 2018 11:39 AM