No-deal Brexit could trigger UK recession, warns Bank of England

BBC | Published: November 29, 2018 11:44:59 | Updated: December 26, 2018 14:00:45

A bus passes the Bank of England in London, Britain on April 9, 2018 — Reuters/File

A no-deal Brexit could send the pound plunging and trigger a worse recession than the financial crisis, the Bank of England has warned.

It said the UK economy could shrink by 8 per cent in the immediate aftermath if there was no transition period, while house prices could fall by almost a third.

The Bank of England also warned the pound could fall by a quarter.

The Bank's analysis comes after the Treasury on Wednesday said the UK would be worse off under any form of Brexit.

This Bank's scenario is not what it expects to happen, but represents a worst-case scenario, based on a so called "disorderly Brexit".

The scenario looks at the five-year period after the UK leaves the EU.

But by the end of 2023, the economy is expected to resume growing.

"These are scenarios not forecasts. They illustrate what could happen not necessarily what is most likely to happen."

"Taken together the scenarios highlight that the impact of Brexit will depend on the direction, magnitude and speed of the effect of reduced openness of the UK economy," Bank of England governor Mark Carney said.

What is a 'disorderly Brexit'?

The Bank of England has made a number of assumptions - not forecasts - about what would cause a disorderly Brexit.

  • The UK reverts to World Trade Organization rules
  • No new trade deals are implemented by 2022
  • The UK loses all access to existing trade agreements between the EU and third countries
  • Severe disruption at borders because of customs checks
  • Migration reverses from 150,000 a year to falling by 100,000 a year

The Bank of England does not give a probability of this happening.

What happens during this disorderly scenario?

Scenarios drawn up by the Bank of England show that GDP would fall by 8 per cent in 2019 against its current forecast.

Growth would quickly resume and the economy would expand again by the end of 2023 but be smaller than where it was before.

Unemployment would rise to 7.5 per cent, house prices fall by 30 per cent, and commercial property prices collapse by 48 per cent.

Interest rates would reach 4 per cent.

What other scenarios did the Bank of England consider?

The Bank looked at three other scenarios.

  • a "disruptive" Brexit - one where the UK retained access to some trade agreements
  • what might happen if trading arrangements were agreed to give the UK a "close" relationship
  • what might happen if trading arrangements were agreed to give the UK a "less close" relationship

A close relationship is one with no customs checks, no regulatory barriers, and a partial deal agreed on financial services.

A less close relationship is one where customs checks start after 2021 and other regulatory checks are put in place.

What happens in these scenarios?

If Brexit is disruptive rather than disorderly, GDP falls 3 per cent over the five years to 2022, house prices slide 14 per cent, and unemployment reaches 5.75 per cent

If a close trading relationship is agreed, the economy could still be 1 per cent smaller than if the UK had remained in the EU but 1.5 per cent higher than the bank's most recent estimate.

If it is less close, the economy's growth could be 3.75 per cent less than if the UK had remained in the EU and 0.75 per cent less than forecast over the last inflation report.

These figures cover the period to 2023.

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