February 17, 2020
UK GDP will be £37bn lower by the end 2022 if there is no trade deal with the EU by the end of this year than if trade talks continue beyond the government’s deadline, a report has claimed. The research by Oxford Economics (registration required) also predicts that financial markets would react negatively to a ‘no trade deal Brexit’, with sterling depreciating by 5 percent against the dollar in late 2020. It would drop around 3.5 percent against the euro, as the eurozone would also face reduced growth in this situation.
The analysis assumes as a ‘baseline forecast’ that there will either be an extension of the transition period beyond the end of 2020 or a ‘political fudge’ that will result in ongoing trade talks. However, it sees a 30% chance that talks will break down, leaving the UK and EU to trade under World Trade Organisation rules from 2021. The UK government’s apparent determination not to extend the transition period and its desire to avoid making commitments that might limit its ability to conclude trade deals with other partners make this a tangible risk, the report says. If there is no trade deal, it expects that UK GDP would be 1.6 percentage points lower at the end of 2022 than in the baseline forecast, equating to a fall of £37bn.
The weaker pound would help boost trade but this would be outweighed by falling consumer spending due to higher inflation.
Should talks break down, the UK and EU would both experience short-term disruption, facing levies on goods imported from the other party, the report states. The damage to EU countries would be much smaller, although Ireland would also be hit hard. UK-EU trade would be subject to further barriers, with the reintroduction of customs controls increasing the administrative burden on traders, while UK exporters would face regulatory issues. There would, however, be some loosening of fiscal and monetary policy to try to cushion the blow.
‘The experience of the various Brexit deadlines in 2019 suggests there would be considerable volatility at the end of 2020 and start of 2021’, the report goes on. ‘Wary of supply-chain disruptions from the new trade frictions, firms would take precautionary action to build up stocks and clients would front-load orders. We would expect this to result in swings in inventories, exports and imports similar to the build-up to the initial March 2019 Brexit deadline. The subsequent, temporary, downturn in activity could be exacerbated if, as in 2019, motor manufacturers opt to schedule their annual shutdowns for the period that has the highest risk of supply-chain disruption.’
Tariffs and other trade barriers would weigh significantly on both exports and imports from the start 2021 in the event of a no trade deal Brexit, the analysis suggests. However, the fall in sterling would mitigate some of the damage to exports while adding to the drag on imports. The weaker pound would help boost trade but this would be outweighed by falling consumer spending due to higher inflation. Business investment would be hit hard, both through lower demand and the UK’s reduced attractiveness as a base for European production.
After the initial shock, the report expects the economy to stabilise and, supported by looser policy settings, GDP growth would recover. However, by the end of 2024, it would still be 1.3 percentage points lower than under the baseline forecast.