What would happen to the UK economy after a no deal Brexit

A
woman holds a placard as she joins EU supporters, calling on the
government to give Britons a vote on the final Brexit deal,
participating in the ‘People’s Vote’ march in central London,
Britain June 23, 2018
Reuters/Henry
Nicholls

• Capital Economics’ Vicky Redwood examined the potential
  economic impact of a no deal Brexit on the UK.
• The UK should skirt around a recession in 2019, but
  growth would take a major hit, she said.
• “Although the more extreme warnings about the
  short-term impact of a ‘no-deal’ Brexit on the economy are
  overdone, there is little doubt that it could deal a reasonable
  blow to GDP growth next year,” Redwood wrote to clients on
  Wednesday.

The prospect of a no deal Brexit reared its head again this week,
as
the government admitted it is stockpiling food and medicines
in preparation for such an occurrence, and
Trade Minister Liam Fox told Business Insider that Britain should
“leave without a deal” if one has not been secured by the end
of the Article 50 period.

Warnings abound about the possibility of shortages of goods, the
grounding of flights, and chaos at borders if no deal does
materialise, but what would happen to the UK economy as a whole?

Writing this week, Vicky Redwood, global economist at Capital
Economics, argued that while “more extreme” warnings about the
economic hit of no deal are being “overblown,” a significant
impact negative impact could still be expected.

“Although the more extreme warnings about the short-term impact
of a ‘no-deal’ Brexit on the economy are overdone, there is
little doubt that it could deal a reasonable blow to GDP growth
next year,” Redwood wrote to clients.

In the longer run, Redwood said, it is very difficult to predict
what the economic impact would be, but there would be significant
negatives in the short tem.

“Whether a no-deal scenario had a good, bad, or little impact on
the economy in the long run would depend on many things,
including how successful the UK was at striking new trade deals
and whether there was an exodus of financial institutions from
the UK. But the short-run effect would surely be bad,” she told
clients.

Redwood did not go into specific detail in terms of forecasts,
but said that a no deal Brexit could “plausibly knock a
percentage point or so off growth next year.”

One of the reasons for that, Redwood argued, is that no deal
would inevitably have a major negative impact on the price of the
pound. 

“On the plus side, this would cushion the impact on exporters,”
she wrote. “But it would also push up inflation, renewing the
squeeze on consumers’ real incomes seen after the pound fell
following the EU referendum in June 2016.”

Real wages for UK workers dropped significantly in the 18 months
after the referendum as inflation rose to 3% but wage growth
remained around 2%.
Britain is a consumer focused economy, so when regular
workers are earning less, and therefore not spending on
non-necessity items, the economy at large suffering.

Such an issue could be compounded, Redwood said, by the UK
“imposing import tariffs on the EU, raising import prices.”

Furthermore, business leaders have largely argued for the softest
Brexit possible, so no deal would likely represent a major dent
to business confidence overall.

“Admittedly, the nosedive in sentiment and GDP growth that was
widely expected after referendum never happened,” Redwood said.
The chart below shows that expected nosedive.

Capital Economics

“But that was partly because of hopes that the UK would reach an
agreement to replicate the current free trade arrangements.”

Redwood is, however, much less pessimistic than some forecasters,
saying that it is unlikely a no deal Brexit will “plunge the UK
into recession.”

One reason for that, she said, is that
Britain wouldn’t need to pay anything to Brussels on
exiting. 

“Remember that leaving without a deal would mean that the UK
wouldn’t have to pay its (front-loaded) Brexit ‘divorce bill’ of
£40bn odd, equivalent to around 2% of GDP. This money could be
used to offset the adverse effects on the economy.”

Redwood also sees Britain falling back on WTO rules for trade as
“not the end of the world.”

“As far as trade is concerned, reverting to World Trade
Organisation (WTO) rules would not be the end of the world. While
the UK would face the EU’s Common External Tariff on its exports
to the EU, tariff rates are on average low at 4%,” she concluded.