No-dealcould cause the worst crash for 45 years with the Pound slumping and Britons hoarding food, a government watchdog warned today.
The Office for Budget Responsibility said crashing out of the EU could have a ‘severe short-term impact’ on the economy.
It said a ‘disorderly’ Brexit next March could cause a ‘sharp fall’ in asset prices, delays at the borders and might spark stockpiling by households and businesses.
The independent watchdog said the scale of the impact was difficult to estimate — but suggested it could be on a par with the ‘Three Day Week’ chaos in 1974, when GDP shrank by 3 per cent in one quarter.
The grim warning came in a discussion paper issued by the OBR, which also suggested the UK has already lost 2.5 per cent of growth since the referendum, and raised doubts about whether there would be much benefit from future trade deals outside the EU.
The grim warning came in a discussion paper issued by the OBR, which also suggested the UK has already lost 2.5 per cent of growth since the referendum
The OBR suggested no-deal Brexit could have a similar impact to the Three Day Week crisis in 1974 — when Ted Heath was Prime Minister
The OBR said its current forecasts assume an ‘orderly’ end to the Brexit negotiations and a ‘smooth’ transition, but crashing out without a deal ‘is not impossible’.
The watchdog said such an outcome ‘could have a severe short-term impact on demand and supply in the economy and on the public finances’.
‘UK asset prices could fall sharply which, together with heightened uncertainty, would cause households and businesses to rein in their spending,’ the paper said.
‘A fall in the pound would also raise domestic prices, squeezing households’ real incomes and spending.’
There could be ‘temporary constraints on supply if, for instance, a lack of customs preparedness led to significant delays at the border’.
Should ‘bottlenecks’ at customs turn out to be significant, it might prompt households and businesses to attempt to stockpile goods in advance, which would further aggravate shortages.
The OBR admitted It was ‘next to impossible’ to assess the potential impact of a disorderly Brexit as there were few precedents.
But it said ‘while not a direct parallel, it is worth noting that the «Three-Day Week» introduced in early 1974 in response to energy shortages and increased militancy on the part of the miners, was associated with a fall in output of a little under 3 per cent that quarter’.
The biggest quarterly drop in GDP after the credit crunch was 2.5 per cent.
The OBR noted that academic studies attempting to compare the UK economy following the Brexit vote with countries which had a similar profile in the years before 2016, indicated ‘output in mid-2018 is around 2 per cent to 2.5 per cent lower than it would have been in the absence of the referendum’.
‘We cannot know for sure what would have happened had the vote gone the other way, but it seems likely that the economy and public finances have been weaker than they otherwise would have been,’ she said.
The paper, which sets out some of the judgments the body will have to make as it incorporates the impact of Brexit into its forecasts, said there were several factors behind the UK’s ‘recent relative weakness of growth’.
Theresa May (pictured at a race audit event today) is struggling to thrash out a Brexit deal with the EU
‘Business investment appears to have been depressed by uncertainty regarding the outcome of the negotiations, while the prospect of worsened access to foreign markets has pushed the exchange rate lower, raising inflation and reducing the contribution to economic growth from real consumer incomes and spending,’ it said.
A partial boost to trade as a result of sterling’s weakness was limited by the international nature of supply chains, ‘uncertainty for exporters’ and resilient consumer demand for imported goods.
Brexiteers have claimed that the freedom to strike trade deals around the world is one of the main benefits of leaving the EU.
But the OBR appeared to question how much of an impact that would have, at least in the medium-term.
It said most studies of the impact of Brexit conclude that increased trade barriers will leave output in both the UK and EU lower than would otherwise have been the case and ‘the scope for trade deals with non-EU countries to offset these effects is likely to be limited’.