UK: Economic hit from no-deal not to be as big as most fear – CE

Although a no-deal is clearly the biggest near-term downside risk to the UK economy, economists at Capital Economics doubt the economic consequences will be as big as most fear. 

Key quotes

“A ‘no-deal’ would most probably involve all those agreements in the Withdrawal Agreement (the financial settlement, citizens’ rights, Northern Ireland), the substantial progress made on financial services equivalence and the rollover of the bulk of the UK’s third-party EU trade deals. A no-deal at this stage would be a less disruptive ‘cooperative’ no deal than a more disruptive ‘uncooperative’ no-deal. As a result, the economic consequences would probably be smaller than most people fear.”

“The imposition of tariffs and customs checks at the borders (the latter will happen if there’s a deal too) will surely cause some economic disruption as trade moves more slowly across borders. And we suspect that a fall in the pound from $1.32 (€1.09) now to around $1.15 (€0.96) would temporarily raise CPI inflation to around 3.5% next year, thereby reducing real household incomes.”

“The Bank of England would probably respond by loosening monetary policy further (perhaps by increasing the pace of its gilt purchase, increasing its purchases of corporate bonds and/or widening its lending schemes to banks and businesses) and the Chancellor may also loosen fiscal policy (perhaps by cutting VAT and/or providing financial support to those businesses whose exports to the EU would be subject to tariffs).”

“We suspect that in a ‘cooperative’ no-deal GDP growth would be around 1% lower in 2021 as a whole than it would be if there were a deal. Put into context, the COVID-19 crisis has meant that GDP this year will be about 11.5% lower than last year and at one point earlier this year it was 25% lower.”

“There’s simply no way of knowing if it’s going to be deal or no deal. But while a ‘cooperative’ no-deal Brexit would probably set back the UK’s economic recovery by six months or so, we suspect it won’t be the economic catastrophe that many fear.”