News | Published July 18 2019

OBR warns of UK recession in no-deal Brexit scenario

The Office for Budget Responsibility has warned that the UK will enter recession in 2020 should the prime ministerial candidates follow through with a no-deal Brexit.

The spending watchdog forecasts the economy to fall by two per cent by the end of 2020 should a withdrawal agreement not be ratified, reversing 18 months of growth.

Since the beginning of 2019, the perceived likelihood of a no-deal Brexit has increased, with both Conservative leadership contenders saying that they would take Britain out of the EU by the October 31 deadline without a deal if necessary.

Both Boris Johnson and Jeremy Hunt have also reinforced their position on the controversial Irish backstop currently outlined in the withdrawal agreement, labelling it a “dead” option.

However, the EU has refused to budge on its insistence that any withdrawal agreement must include the backstop, with the EU’s chief negotiator Michel Barnier saying that the deal negotiated with incumbent prime minister Theresa May is the only way for the UK to leave the bloc “in an orderly manner”.

In its opening assessment of a no-deal Brexit and the estimated economic consequences, the OBR concluded that the economy would suffer in 2020 and begin to regain ground in 2021.

Tariffs of four per cent would be imposed on goods traded with EU states, but large-scale disruption at the border would not be expected as previously thought.

However, uncertainty and a lack of confidence would affect the flow of investment with added trade regulations and tariffs having a negative impact on exports.

The OBR said that “together, these [factors] push the economy into recession, with asset prices and the pound falling sharply”.

The watchdog predicts that public sector borrowing would rise by £30 billion a year under this scenario, hiking up debt by as much as 12 per cent by the year 2024.

The OBR did admit their prediction is not the "worst case scenario" and it is a notably less gloomy outlook than that forecast by the Bank of England and the Treasury.

Their forecasts predicted a recession worse than that of 2008 and an eight per cent fall in economic growth. The Treasury also believes that by 2035, the economy will have shrunk by as much as £90 billion under no-deal, a view which has been heavily criticised by members of the Eurosceptic ERG group of MPs. 

Conservative MP Jacob Rees-Mogg branded the outlook “silliness” in his column for the Telegraph, counter-arguing that leaving with no-deal may actually boost the economy by £80 billion.

However, incumbent Chancellor Philip Hammond responded to Rees-Mogg's comments on Twitter, calling his views "terrifying", given the likelihood of the North East Somerset MP to assume a ministerial role under Theresa May's successor.

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Authored by

Scott Challinor
Business Editor
July 18 2019

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