UK nearing ‘full-blown’ recession as no-deal Brexit looms

no-deal Brexit recession

The UK’s budget watchdog has warned that leaving the European Union without a Brexit deal would throw the country into a recession.

The Office for Budget Responsibility (OBR) said the UK economy appears to have “flatlined” and that a no-deal Brexit scenario could more than double the country’s budget deficit by next year.

“This raises the risk that the economy may be entering a full-blown recession,” the OBR explained in its fiscal risks report released July 18.

The OBR analysis is based on the “less disruptive” of two no-deal Brexit scenarios produced by the International Monetary Fund earlier this year.

The UK is scheduled to leave the EU on October 31.

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Looming no-deal consequences

According to the OBR, in a no-deal Brexit scenario, “heightened uncertainty and declining confidence” would deter investment, while higher trade barriers with the EU would hinder exports.

“Together, these push the economy into recession, with asset prices and the pound falling sharply,” explained the OBR, noting that the pound would drop by 10% immediately after a no-deal withdrawal.

The OBR also said the UK’s economic growth would fall by 2% by the end of 2020, and the government would have to borrow an additional £30 billion ($37.4 billion) annually starting next year.

But the OBR warned that its forecast is “by no means a worst-case scenario” of what a no-deal Brexit could bring.

According to projections from the Bank of England, in the immediate aftermath of a chaotic Brexit, the UK economy could decline by 8%, and the pound could plummet by as much as 25%.

Speaking to reporters after the OBR report came out, UK Treasury chief Philip Hammond said he “greatly” fears the impact of the “kind of no-deal Brexit that is realistically being discussed.”

“Even in the most benign version of a no-deal exit, there would be a very significant hit to the UK economy, a very significant reduction in tax revenues and a big decrease in our national debt – a recession caused by a no-deal Brexit,” said Hammond.

“But that most benign version is not the version being talked about by prominent Brexiteers. They are talking about a much harder version, which would cause much more disruption to our economy, and the OBR is clear that in that less benign version, the hit would be much greater, the impact would be much harder, the recession would be bigger.”

Where are things are at with Brexit right now

The same day the OBR report came out, British lawmakers voted on a measure intended to make it difficult for the next prime minister to force through a no-deal Brexit by suspending Parliament.

Boris Johnson, considered the frontrunner to succeed Theresa May as prime minister, has stated his willingness to ensure Brexit occurs on the deadline regardless of whether or not a deal is in place. He has also refused to rule out proroguing Parliament to force through a no-deal Brexit.

However, British lawmakers recently passed an amendment designed to keep Parliament open in the lead up to the Brexit deadline. The amendment requires MPs to sit on specific dates in October, making it difficult for the next prime minister to suspend Parliament as a way to block lawmakers from intervening to stop a no-deal Brexit.

And despite vows from the two contenders for the prime minister gig – Johnson and Jeremy Hunt – to renegotiate a deal with the EU, the bloc isn’t budging on its refusal to reopen discussions.

Ursula von der Leyen, the newly-elected president of the European Commission, said that despite the position of the leadership contenders, the existing agreement is “not dead.” She added that the EU should consider extending the Brexit deadline past October 31 if there are “good reasons.”

“It is a good agreement, which was negotiated properly in accordance with the red lines drawn by the British government,” Von der Leyen stated.

In an interview with the BBC, Michel Barnier, the EU’s chief Brexit negotiator, said the UK “will have to face the consequences” of a disorderly exit from the bloc.

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What it means for the US

So, what does all of this mean for the US? The extent that Brexit will affect the US largely hinges on how the withdrawal process shapes the UK’s trade position moving forward.

According to data from the Office of the United States Trade Representative, the UK was the US’s fifth-largest market for exports in 2018. Last year, US goods and services trade with the UK totaled approximately $262.3 billion, with $141 billion in exports and $121.2 billion in imports. The US had a goods and services trade surplus with the UK of $19.9 billion in 2018.

Exports to the UK supported an estimated 665,000 American jobs in 2015, which is the latest year for which data is available.

Since the UK can’t formally negotiate new trade deals while it’s still part of the EU, there are many unknowns about what sort of bilateral trade agreement the US and UK would reach.

However, during his recent state visit to the UK, President Donald Trump did give some indication of the approach to negotiating a trade deal between the two countries, saying “everything is on the table.”

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