Britain will plunge into its first recession in a decade should the government quit the European Union without a deal, according to the latest in a string of gloomy forecasts about the UK’s fortunes outside the EU’s free trade area.
Economists at the accountancy firm KPMG said that the knock-on effects to Britain’s trade and business confidence of a no-deal Brexit would lead to the economy shrinking by 1.5% next year.
Consumer spending, which has provided between 60% and 80% of growth in the economy over the last three years, would also be severely dented.
The warning follows forecasts by the Bank of England and the Treasury’s independent forecasting unit, the Office for Budget Responsibility, which have alerted the government to the negative economic consequences of losing access to the EU single market and customs union overnight.
The central bank and the OBR have predicted a recession in the wake of a no-deal Brexit. KPMG forecasts that securing a deal ahead of the 31 October deadline would have the opposite effect of boosting GDP growth to 1.5% in 2020.
Yael Selfin, KPMG UK’s chief economist, said she expected that in every quarter of next year the economy would contract, leading to the first recession since 2009 and the aftermath of the financial crisis.
“With the Brexit debate poised on a knife-edge, the UK economy is now at a crossroads. It is difficult to think of another time when the UK has been on the verge of two economic out-turns that are so different, but the impact of a no-deal Brexit should not be underestimated,” she said.
“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.”
The economy has already slowed in recent months, with only the services sector continuing to expand, according to official figures. An industry survey by business advisers BDO found that optimism in the sector fell dramatically last month as the prospect of a recession became a possibility
A survey of more than 4,000 services firms found that optimism was now at levels not seen since 2013.
Q&AWhat does a no-deal or WTO-rules Brexit mean?
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If the UK leaves the EU without a deal it would by default, become a “third country”, with no overarching post-Brexit plan in place and no transition period. The UK would no longer be paying into the EU budget, nor would it hand over the £39bn divorce payment.
The UK would drop out of countless arrangements, pacts and treaties, covering everything from tariffs to the movement of people, foodstuffs, other goods and data, to numerous specific deals on things such as aviation, and policing and security. Without an overall withdrawal agreement each element would need to be agreed. In the immediate aftermath, without a deal the UK would trade with the EU on the default terms of the World Trade Organization (WTO), including tariffs on agricultural goods. This has also been referred to by government ministers as an "Australia-style deal". Australia does not have a free trade agreement with the EU.
The UK government has already indicated that it will set low or no tariffs on goods coming into the country. This would lower the price of imports – making it harder for British manufacturers to compete with foreign goods. If the UK sets the tariffs to zero on goods coming in from the EU, under WTO “most favoured nation” rules it must also offer the same zero tariffs to other countries.
WTO rules only cover goods – they do not apply to financial services, a significant part of the UK’s economy. Trading under WTO rules will also require border checks, which could cause delays at ports, and a severe challenge to the peace process in Ireland without alternative arrangements in place to avoid a hard border.
Some no-deal supporters have claimed that the UK can use article XXIV of the General Agreement on Tariffs and Trade (Gatt) to force the EU to accept a period of up to 10 years where there are no tariffs while a free trade agreement is negotiated. However, the UK cannot invoke article XXIV unilaterally – the EU would have to agree to it. In previous cases where the article has been used, the two sides had a deal in place, and it has never been used to replicate something of the scale and complexity of the EU and the UK’s trading relationship.
The director general of the WTO, Roberto Azevêdo, has told Prospect magazine that “in simple factual terms in this scenario, you could expect to see the application of tariffs between the UK and EU where currently there are none”.
Until some agreements are in place, a no-deal scenario will place extra overheads on UK businesses – eg the current government advice is that all drivers, including lorries and commercial vehicles, will require extra documentation to be able to drive in Europe if there is no deal. Those arguing for a “managed” no deal envisage that a range of smaller, sector-by-sector, bilateral agreements could be quickly put into place as mutual self-interest between the UK and EU to avoid introducing or to rapidly remove this kind of bureaucracy.
Peter Hemington, of BDO LLP, said: “This month’s dramatic fall in confidence is a very worrying event. Pessimistic companies don’t invest or hire, which is how recessions start.”
Selfin said a no-deal Brexit threatened household confidence, business investment and cross-border trade, “with policymakers lacking the means to fully mitigate negative impacts”.
The Resolution Foundation thinktank said its review of the UK’s readiness for a post-Brexit recession found that neither the government nor the Bank of England had the means to prevent the economy slipping into a prolonged downturn.
It said policy changes over the last 10 years linked to the government’s austerity programme meant the poorest households had lost access to benefits that protected them in the 2008 crash from falling into extreme poverty.
A switch from generous tax credit payments, which topped up wages when workers were forced to accept shorter hours or lost their jobs, to universal credit was a key reason poorer households were more vulnerable in a recession, the thinktank warned.
“The UK’s macroeconomic policy framework has not kept pace with significant changes to our economic environment and is therefore at risk of leaving the country underprepared for the next recession. That is not a risk policymakers should take lightly,” it said.
Governments relied heavily on central banks to rescue their economies during the last recession with moves to lower interest rates and the cost of long-term borrowing by businesses.
The foundation said the Bank of England and other central banks were largely out of firepower, leaving ministers with a significant gap in their armoury should the economy weaken.
To overcome this, the thinktank said the government should move to restore the safety net of benefits that have been cut in the last 10 years and strengthen the remit of the Bank of England to expand credit to households and businesses when the economy contracts.