UK will plunge into recession if it leaves Europe without Brexit deal

Office of Budget Responsibility issues warning

By Julia Horowitz, CNN Business
Adam Berry/Getty Images

A demonstrator with a pro-European Union citizen's initiative

LONDON - Leaving the European Union later this year without a Brexit deal would plunge the United Kingdom into recession.

The UK Office of Budget Responsibility (OBR) warned Thursday that "heightened uncertainty and declining confidence" would deter investment while higher trade barriers would slam exports.

"These push the economy into recession, with asset prices and the pound falling sharply," said the government's budget watchdog. UK stock markets would fall 5%, while the pound would plummet 10%. GDP would shrink by 2% by the end of 2020.

The report is a stark warning ahead of October 31, the latest deadline for Britain to depart the European Union.

Boris Johnson, the frontrunner to succeed Theresa May as prime minister next week, has said that he'd be willing to force Brexit on that date if he's unable to negotiate a new exit deal with EU officials.

 

Rising Brexit risks

 

The potential consequences of such a departure are generating alarm, and hurting the pound. It sank to a two-year low below $1.24 earlier this week.

UK Treasury chief Philip Hammond told reporters Thursday that he is "greatly" afraid of the economic impact of the type of break that is "realistically being discussed" by some prominent politicians.

Hammond noted that the OBR report does not even reflect the most severe outcome.

According to a Bank of England simulation of the most chaotic Brexit, the UK economy could contract by 8%. The value of the pound could slump by as much as 25%.

The economic fallout of that scenario would be worse than Britain suffered because of the global financial crisis.

"The report that the OBR have published ... shows that 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 increase in our national debt," Hammond said.

The watchdog said that leaving without a deal would force the UK government to borrow an extra £30 billion ($37.4 billion) per year starting in 2020.

 

'Foolhardy gamble'

 

In a separate report published early Friday, a committee of UK lawmakers said a "no deal" Brexit would be a "foolhardy gamble" that could cause severe disruption to industries such as manufacturing, chemicals, food and drink and retail.

"The UK's higher education sector — a world leader in science and research — would experience a short-term shock and longer-term reputational damage from which it would struggle to recover," wrote Hilary Benn, the lawmaker who chairs the committee.

"UK services businesses would risk loss of market access and face uncertainty about how no deal would affect their staff working in the EU because they would be treated as third country providers by the EU," he added.

Meanwhile, the European Union is sticking to its guns. The bloc has said that it's unwilling to make significant revisions to the Brexit agreement it negotiated with May.

Asked what would happen if Britain simply tore up its EU membership card, Michel Barnier, Europe's chief Brexit negotiator, said in a BBC interview that "the UK would have to face the consequences."

The threat of Brexit has already caused serious damage to the UK economy. The looming departure has meant three years of uncertainty for British companies, crushing business investment and weakening the country's housing market.

Britain could already be entering a "full-blown recession," the OBR said in its report. The latest data indicates that the UK economy "flatlined at best" in the second quarter of 2019, it added.

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