The mounting risk of no-deal Brexit may have pushed the UK economy into a recession already, one of the country’s foremost economic forecasters has warned.
Sounding the alarm before the expected elevation of Boris Johnson to Downing Street this week, the National Institute of Economic and Social Research (NIESR) said there was a one in four chance the country is in a recession currently.
Against a backdrop of renewed uncertainty and the increasing likelihood of no-deal Brexit under a Johnson premiership, growth has stalled in recent months, business investment has faltered and the pound has fallen sharply.
Some economists believe the UK economy contracted in the three months to June, marking the first negative quarter in seven years, as a consequence of factory closures planned to avert any potential disruption around the original 29 March Brexit deadline. Official growth figures for the second quarter are due to be published next month.
Economists consider two consecutive quarters of economic contraction a recession. NIESR forecasts GDP fell by 0.1% in the second quarter, with a 25% chance that GDP declines again in the third quarter between July and September. However, the thinktank’s central forecast is for growth of 0.2% in the third quarter.
“The short-term outlook for the UK economy is very murky indeed, with a significant risk that a severe economic downturn will begin within the next six months,” NIESR said.
Warning the risk of leaving without a deal was rising with less than six months left before the next prime minister runs out of time to renegotiate a deal with Brussels, NIESR said the country risked an even more severe downturn in the autumn. It said economic growth over the long run could be damaged by about 5% a year.
Jagjit Chadha, director of the thinktank, which is Britain’s longest-established independent research institute, said a no-deal Brexit would in effect “throw concrete” in the wheels of British trade with the EU at a moment when the UK is already “fragile and vulnerable” from a slowdown in growth.
“However we look at it, there will not be much economic joy in such an exit,” he added.
Alongside domestic uncertainty, growth in the world economy has deteriorated over recent months against a backdrop of rising trade tensions between the US and China, harming business confidence and serving as a brake on growth.
NIESR cut its forecasts for economic growth in 2019 and 2020 to 1.2% and 1.1%, down from 1.4% and 1.6% previously, as a result of the loss of momentum. However, it still said its forecasts were based on the next prime minister securing a deal with Brussels this autumn.
Acknowledging that the UK crashing out without a deal on 31 October was becoming increasingly likely, the thinktank warned that the pound could plunge by about 10% against the US dollar to about $1.10. Inflation would then likely surge to about 4% as the price of importing goods to Britain rises, the highest level in almost eight years and more than double the Bank of England’s target of 2%.
It said Threadneedle Street could cut interest rates by 0.5 percentage points to 0.25% and the Treasury could ramp up spending to offset the hit to the economy, enabling growth to remain at zero next year under such a scenario.
However, given the wide degree of uncertainty over the exact impact a no-deal Brexit would have on the UK, it said the outcome could be much worse – with a 30% chance of recession next year.
“There is no palpable growth for some years to come following a no-deal Brexit,” Chadha said.
The thinktank’s forecast for a no-deal scenario where the UK escapes recession next year could embolden Brexiters. However, it said public borrowing would rise sharply, breaking the Conservatives’ deficit reduction promises.
Public borrowing as a percentage of GDP could balloon from the current level of 1.2% of GDP to about 3.8% by 2022 under such a scenario. The Tories have pledged to keep borrowing below 2% by that time.