The politics around the exit process are uncertain but the economics is clearerby Vicky Pryce / September 27, 2018 / Leave a comment
The chances of a complete no deal Brexit were never thought to be very high, but talk of it as a serious possibility has increased considerably. That is since the disappointing Salzburg meeting where Theresa May’s Chequers plan was rejected. Further, May does not appear to have a majority in the Commons for her Brexit vision. What would be the economic consequence of a no deal?
The EU is generally known for managing to achieve a compromise deal at the 11th hour. But if the UK does crash out then the long-term effects will be severe. Work done for the Mayor of London, by Whitehall and the Treasury all predict output being some 8 per cent to 10 per cent below where it would otherwise have been by 2030. In fact, any arrangement with the EU compared to our current position will have costs, as the IMF has recently warned. But the no deal scenario has the largest negative impact of all.
All these forecasts are done blind as we don’t know what the response of the authorities will be and what WTO regime we will adopt. A low-tariff one that means we see the UK manufacturing base decline, agriculture wiped out and plummeting inward and domestic investment? Or a protectionist one which again limits the attractiveness of the UK economy to outsiders? Whatever option, the long term outlook is for slower growth. And the lost output does not get recovered in a hurry—if at all.
But it is the short term that is most interesting. Will the UK have a technical recession, in other words a fall in output for at least two consecutive quarters soon after we crash out? And if so how intense will it be?
The answer to the first question is most probably yes. Unless there are parallel arrangements of some sort to keep things ticking for a while it will be a major economic crisis. Daily commerce and exchange—from flights, to lorries, to just-in-time components to all financial products currently governed by EU laws—would suddenly have to stop, as a no deal crash out implies a repudiation of all existing law governing trade between Britain and Europe.
In this scenario the markets would react very negatively, the pound would fall…