What would a no deal Brexit actually look like? Part I

It would be hard to avoid a recession, but it wouldn't be like 2008-9, says Nina Skero, chief economist at the Centre for Economic and Business Research.

by Adam Gale
Last Updated: 12 Sep 2019
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Future Business

The political situation is developing at remarkable speed and taking unpredictable turns, so who’s to say when (or whether) the UK will leave the European Union, and whether it will be with or without a deal? The sobering truth is that the political uncertainty that has been business’s unwelcome house guest for the past three-and-a-half years is unlikely to go anywhere, whatever happens.

In the last few weeks, MPs have wrested the legislative agenda from the government, passing a bill that would compel Boris Johnson to request an extension from the EU, which he may or may not do. The Prime Minister responded by trying, and failing, to force an early general election, which might still happen before the planned Brexit date of 31 October. Judges approved Johnson’s decision to prorogue Parliament, then rejected it again, leaving the matter now with the Supreme Court.

All the while, EU negotiations on a new withdrawal agreement are technically ongoing. These may (but probably won’t) provide a much-needed compromise to break the impasse.

You’d be tempted to think a general election could reduce the uncertainty but, assuming the country is as divided as it was before the referendum, that’s unlikely to be the case. Even if Johnson forces through no deal on 31 October without an election (or, dare we say, another referendum), it would hardly draw a line under the matter. After all, no deal, which many business groups have consistently opposed, probably wouldn’t mean no deal ever, just no deal for now. Subsequent negotiations with the EU and other countries could carry on for years and take us in wildly different directions, from Little England to Singapore-On-Sea.

The bottom line for businesses is that they will need to prepare to trade on World Trade Organization terms until Brexit actually happens (which could be very soon) or until the moment it is decisively taken off the table, which could be years away. 

Here is the first of five interviews with leading experts to help explain what a no deal would actually look like. 

Nina Skero

Chief economist, Centre for Economics and Business Research 

It would be hard to avoid a technical recession [in the event of a no-deal Brexit]. Keep in mind that it’s not just Brexit that’s creating downside risks. There’s a broader global slowdown with repercussions from the US-China trade dispute, domestically we’re in a stage of the consumer credit cycle where people are paying off their debts and, after Brexit, you would see companies drawing down their stockpiles. 

It’s almost a perfect storm, but we’re not imagining anything on the scale of the global financial crisis. Some businesses might have short-term cash-flow issues, so you would hope the government would provide some emergency financing to stop the shock translating into a much longer-term problem.

No deal would still leave a lot of questions open on things like trade deals and immigration, where I’d hope sense would prevail over sentiment. If there’s an approach to immigration that’s very open to both EU nationals and non-EU nationals, there could actually even be a net positive to our competitiveness in the long term. If things went in the opposite direction with migration controls and if there weren’t any trade deals in the next 10 years, then that’s obviously a big downgrade compared with no Brexit. 

We’ve assumed there will be a free-trade agreement with Europe inside a five-year time frame, because we already have an existing framework to fall back on. With the US and Asia, I think it’s more of a 10-year timeline. There are a lot of elements that need to fall into place, and there’s no guarantee that there will still be the political will to drive it. 

Recessions can sometimes be a self-fulfilling prophecy. If you expect one, then you don’t make investments, you don’t hire and you contribute towards it coming true. I do think businesses will need to be a bit more bold and decisive than they have been for a long time, whether that’s in terms of looking for new import partners or going into new markets or opening up EU offices. We’ll be in big trouble if everyone decides to "wait and see" for too long. 

Image credit: Fotografierende/Pexels

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