A no-deal Brexit would have a significant short-term economic impact on the UK, plunging the country into recession, causing a rise in unemployment and prompting an estimated 6 per cent slide in house prices, according to a report from global accountancy firm KPMG.
The “relatively shallow” recession in the wake of the UK crashing out of the EU without a deal would likely last for a year and lead to a 1.5 per cent contraction in the UK’s economy in 2020. The up-to 10 per cent decline in the pound’s exchange rate in this scenario would also push up inflation to above the Bank of England’s 2 per cent target, potentially forcing the central bank to lower its key interest rate to near zero, said Yael Selfin, KPMG’s chief economist.
If the UK manages to agree a deal with the EU, however, growth is projected to reach 1.5 per cent next year while house prices could increase by 1.3 per cent.
Fears that the UK would crash out of the EU on October 31 reached a peak at the start of September, with investors pricing in as much as 40 per cent probability that Boris Johnson would deliver on his promise to leave the monetary bloc on October 31, “do or die”.
After an intense week of politics that saw MPs working together to resist Mr Johnson’s plans, the likelihood of leaving without a deal has temporarily receded, although investors remain cautious in the unpredictable political environment.
“[The new government’s] resolve to leave the EU by 31 October has become increasingly clear . . . and the proximity of the date make the outlook for the next two years rather bipolar,” the report said.
Concerns about an approaching recession in the UK are already growing. After notching up 0.5 per cent growth in the first quarter of the year, the economy contracted by 0.2 per cent between April and June, as the uncertainty created by the prolonged Brexit process hampered investment and growth.
A separate report from the Resolution Foundation, an independent think-tank, warned that Britain’s next recession could prove to be “unnecessarily painful” as the BoE traditionally lowered interest rates by 5 percentage points on average, in response to recessions in recent decades.
With the central bank’s key rate already standing at 0.75 per cent, “it is hard to envisage interest rate cuts of more than 1 percentage point,” said the report.
Alternative policy tools such as quantitative easing are also likely to be less effective than before, according to the report. The deep rate cuts combined with QE “delivered two-thirds of the overall support to the economy” at the time of the financial crisis, successfully preventing a recession turning into a depression. But with 10-year government borrowing costs already standing at below 0.5 per cent, a further reduction in long-term rates will have a smaller impact.
“Cuts in interest rates and increased QE could only provide around a quarter of the support to the economy needed in even an average recession,” said James Smith, the report’s lead author and director of research at the foundation.
KPMG added that the 10 per cent expected decline in the pound’s value is unlikely to help exporters in the country as unresolved issues and confusion over trade and borders would cancel out the positive impact of a weaker currency.
“The most damaging impacts could come from potential shortages of imported foodstuffs as well as medicines in the immediate term, negatively impacting households’ sentiment,” Ms Selfin said.
