News | Published July 22 2019

Economy may already be in recession with Brexit standoff, NIESR says

The National Institute of Economic and Social Research suggest that the UK economy may already be in recession with businesses still in limbo over Brexit.

The NIESR says there is a 25 per cent chance that a technical recession is underway, prompted by two successive quarters of economic contraction, with the risk of an economic downturn over the next six months labelled “significant”.

The researcher also says that the economy has “stalled”, predicting a negative outlook beyond October this year despite growth in the early part of 2019.

It says that the economic slowdown over the second quarter of 2019 has shrunk the economy by 0.1 per cent, coming as a result of Brexit-related stockpiling prior to the original deadline of March 31 and exacerbated by a halt in the automotive industry.

Should a withdrawal agreement be agreed with the EU, economic growth is nonetheless expected to slow to 1.2 per cent in 2019, and even more so in 2020 to 1.1 per cent with uncertainty set to “hold back investment” while “productivity growth remains weak”.

Yet, the NIESR does feel that an “orderly no deal” could prevent the economy from regressing badly.

A shrink in the economy would inevitably come under a no-deal Brexit according to analysts but the NIESR says that policymakers could minimise the damage in the short-term.

The NIESR's outlook in a no-deal scenario is that the Bank of England will cut interest rates to 0.25 per cent in November 2019 along with the government introducing further contingency measures. In such circumstances, unemployment is forecast to climb only 0.2 per cent higher than base predictions of 4.1 per cent in 2020.

There would then be an increase in government borrowing, with the deficit as a percentage of GDP climbing to 2.7 per cent under a so-called "orderly no-deal".

However, inflation would then, according to the NIESR, climb to four per cent in 2020 with import costs going up as a result of a fall in the value of the pound. This, in turn, would then see interest rates going back up over next year.

In such a scenario, the NIESR predicts that GDP will fall overall between five and six per cent lower than its base prediction in the long term, despite policymakers being able to provide short-term respite.

Although monetary policy would become more "effective" under no-deal according to the researcher, it will always have to "face the trade-off between fighting higher inflation, as a result of higher import prices and a sharp exchange rate depreciation, and stabilising the level of output”.

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Authored by

Scott Challinor
Business Editor
July 22 2019

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