Britain would enter a year-long recession on a par with the early 1990s, the pound would crash by 10%, and house prices would tumble, according to the latest grim look at the economic toll of a no-deal Brexit.
The UK’s fiscal watchdog warned that Britons would face surging price inflation following a plunge in the value of the pound, but said the Bank of England was likely to slash interest rates from 0.75% to just 0.2% by the end of 2020 to help offset the economic woes.
In its Fiscal Risks Report, the Office for Budget Responsibility (OBR) said that, if the UK crashed out of the EU without a deal on October 31, the UK would be tipped into a “full-blown” recession by the end of the year.
£30bn Amount added to public borrowing each year under a no-deal Brexit
OBR Fiscal Risks Report
But experts said the OBR’s assessment is a far cry from the Bank of England’s doomsday report published late last year and the OBR itself admitted it was “by no means a worst-case scenario”.
The OBR – headed by chairman Robert Chote – said gross domestic product (GDP) could drop by 2.1% over the next year, driven lower as companies cut their investment amid higher trade costs and the wider economic woes.
Consumer spending would also fall as wages are squeezed by the Brexit-hit pound and higher trade tariffs, compounded by under-pressure wage growth, while unemployment would also initially increase – peaking at just over 5% in 2021.
All this would knock the housing market, with prices likely to plummet by nearly 10% between the start of 2019 and mid-2021.
The economy would start to pick up again in mid-2021, according to the OBR.
Its scenario analysis also looks at the impact on the public finances, warning that a cliff-edge Brexit would add around £30 billion a year to borrowing from 2020-21 onwards and around 12% to national debt as a share of GDP by 2023-24.
The OBR added that. while the plummeting pound will give a fillip to exports, this will be largely offset by the immediate hike in trade tariffs.
While the report makes for painful reading, the OBR said its stress tests are not as catastrophic as the Bank’s controversial no-deal Brexit report last November, which predicted an 8% contraction in the economy, a 25% crash in the pound and a 30% dive in house prices.
It has instead based its analysis on the International Monetary Fund’s outcome scenario.
It said: “A more disruptive or disorderly scenario, closer to the stress test we considered two years ago, could hit the public finances much harder.”
It comes as the Treasury Select Committee separately on Thursday said it has asked the Bank and the Treasury to provide updated scenario analysis of a no-deal Brexit ahead of Parliamentary votes before the October deadline.
Dr Ivan Petrella, associate professor of economics at Warwick Business School, said the OBR gives a “much more optimistic assessment of the potential dangers of a no-deal Brexit than the Bank of England, the Treasury and most commentators are currently predicting”.
He added: “I think the short-term impact projected by the OBR is a much more likely outcome than the severe recession predicted by the Bank of England.”
But he warned that a “rushed no-deal exit is likely to have a more prolonged negative impact on the economy”.
Source: Shropshire Star
