No-deal Brexit in October could lead to ‘severe downturn’: Report

London, United Kingdom – A prominent British think-tank said on Monday that economic prospects for the UK are deteriorating as a new prime minister is about to be installed in Westminster.

The National Institute for Economic and Social Research (NIESR) warned there is a one-in-four chance the country has already entered a technical recession, and a disorderly no-deal Brexit in October could lead to a “severe downturn” in the economy within the next six months – and with it, a fall in living standards.

Prime Minister Theresa May is expected to officially step down on Wednesday.

The name of the new prime minister – elected by 160,000 members of the Conservative Party – will be announced on Tuesday. It is widely expected to be former mayor of London and ex-foreign secretary Boris Johnson, who is running against his successor, Jeremy Hunt.

Both Johnson and Hunt have promised to renegotiate May’s deal with the European Union, particularly the controversial backstop protocol of the withdrawal agreement, aimed at avoiding a hard border on the island of Ireland.

Both have promised to take the UK out of the EU without a deal by the new October 31 deadline should EU officials insist the withdrawal agreement is not up for renegotiation, as they have done so far.

The recently elected president of the European Commission, Ursula von der Leyen, restated this position last week, while conceding the EU would remain open to considering a further Brexit delay “for a good reason”.

In its latest quarterly forecast, NIESR predicted even if a no-deal Brexit is avoided, the UK economy will see a one percent growth in 2019 and 2020, revised down from the 1.5 percent figure it predicted earlier this year as the March Brexit deadline loomed.

An orderly no-deal scenario – involving temporary contingency measures aimed at minimising disruption – would lead to a stall in growth in 2020.

Trade between Britain and the EU, its largest trading partner, would revert to WTO rules in case of no deal.

While EU exit “throws sands on economic activity” by confounding economic planning by firms and government, a no-deal Brexit would “throw concrete into the wheels” of the British economy, NIESR’s director Jagjit Chadha told journalists at a press conference.

Chronic levels of uncertainty underpin the forecasts and are affecting many aspects of economic life – not least the value of Sterling, which has reached two-year lows in recent weeks as the two candidates for prime minister ramped up their no-deal rhetoric.

Meanwhile, on the domestic level, businesses have been holding off investment, while political uncertainty, including the possibility of a general election in the autumn, has added fuel to the fire.

In the context of a slowdown in global economic activity, NIESR said the UK’s economy is losing momentum, making it more likely it will contract for another quarter and therefore enter a recession. The think-tank’s global economic forecast for this year puts global GDP growth at its slowest for a decade.

While debate has focused on whether there will or will not be a no-deal Brexit, Chadha said there has been little discussion on the government’s plans for the aftermath of such a scenario.

“We’ve had very little explanation by any of the candidates for prime minister [about] what they would do in the event of a no-deal Brexit,” Chadha said.

“We don’t think just by having a Brexit, that relaxes the concern over the level of uncertainty in the economy,” Chadha continued, adding regardless of any policy measures put in place, a no-deal Brexit could cost five percent of GDP “in a permanent way, every year” compared with a soft Brexit – where Britain remains in the EU’s single market, customs union, or both – or remaining in the EU.

“The short-run impact will depend on the extent to which monetary and fiscal policy responds to that, as well as the extent to which, in the event of a no-deal Brexit, confidence and investment take a hit, which leads to demand reducing at the same time, as well,” Chadha said.

Chancellor Philip Hammond announced on Sunday he will resign rather than support Johnson through a no-deal Brexit.

The Office for Budget Responsibility, a public body, said last week leaving without a deal could push the UK economy into recession and result in the doubling of its deficit.

NIESR agreed that no-deal might inevitably lead to a “loosening of the public purse”.

Chadha argued the public at large may be in for a “double loss”.

“If we decide to increase public expenditure directly to offset those bits of the economy that have been hit in a negative manner by a no-deal Brexit shock, we won’t be helping those bits of the economy that have been crying out for support for the last 10 years or so,” Chadha said.

“That means further education, social care, infrastructure.”