A no-deal Brexit would wipe a further 2% off UK output as the battered economy reels from the coronavirus pandemic, the UK’s fiscal watchdog has warned.
Grim forecasts from the Office for Budget Responsibility (OBR) found that failure to secure a trade deal with the EU would hit GDP by 2% in 2021, and 1.5% after five years.
It had already predicted that output would fall by 4% in the long run compared to staying in the EU – even if Britain hammers out a new trading relationship by the time the transition period ends in December.
A no-deal scenario would also delay recovery from the coronavirus pandemic by nearly a year to summer of 2023, the watchdog said.
It has already predicted the economy will not return to pre-crisis levels until the end of 2022.
In an economic outlook published alongside Rishi Sunak’s Spending Review, the OBR said a no-deal scenario “has the effect of delaying the point at which output regains its pre-virus peak by almost a year to the third quarter of 2023”.
In its worst scenario, recovery is pushed into the Spring of 2025, while in the best case, it moves to the start of 2022.
The OBR delivered a scathing verdict on the deadlocked trade talks, saying: “The uncertainty created by the pandemic is compounded by the presently unresolved nature of the UK’s future trading relationship with the EU after the transition period ends on 31 December.”
Temporary disruptions to cross-border trade and the knock-on impacts would account for the hit to the economy.
The gloomy forecast will ramp up pressure on Boris Johnson to secure a deal with Brussels, with just weeks to go until the end of the transition period.
If negotiators cannot hammer out a compromise over sticking points such as fishing and state aid, the UK will be forced to resort to World Trade Organisation terms – effectively a no-deal Brexit.
The OBR warned that neither businesses nor the Government were ready for the changes Brexit would bring.
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“We continue to assume that the UK and EU conclude a free trade agreement and that there is a smooth transition to the new trading relationship after the transition period ends on December 31 2020,” it said.
“However, there is evidence that neither the Government nor businesses are fully prepared for the imminent changes even if a deal is agreed.
“For example, the Bank of England’s decision maker panel survey for October reports that over a third of firms are either only partially prepared or not prepared at all.
“If an agreement is successfully concluded, we assume that officials on both sides of the border will display a degree of discretion in order to minimise disruption to trade.”
In an update to MEPs on Wednesday, European Commission president Ursula von der Leyen said there was still no clarity on whether a deal would be signed.
“I cannot tell you today if in the end there will be a deal,” she said.