WHILE Chancellor Philip Hammond and his Conservative colleagues have had a right good giggle this week over Budget speech wisecracks, Standard & Poor’s has forecast a no-deal Brexit would send the UK into a painful recession lasting more than a year.
S&P’s sober assessment provides further ample illustration, if more were needed, of why the UK’s current economic predicament is absolutely no laughing matter. There is no time or place for Mr Hammond’s quips about public conveniences, delivered during a protracted and pun-laden Budget speech. This Westminster Government should be taking a good look at itself, and what its actions mean for ordinary people in the UK.
We are at a dangerous place on the road. The Brexiters seem determined to pursue an ideologically driven departure from the European Union, regardless of the cost to the UK’s economy and population at large.
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Unless someone can stop the Brexit bandwagon in its tracks before we reach the cliff-edge, and keep the UK in the EU or at the very least in the single market and customs union, the outcomes range from bad to grave. Laughing in the face of danger is one thing but, when the living standards of tens of millions of citizens are under grave threat from Brexit, a little bit more decorum should surely have been in order from the Conservatives when the Budget was delivered.
Mr Hammond was confident there would be a deal on the UK’s post-Brexit relationship with the EU. But he did say he was planning for “all eventualities”. And he talked about the option of turning the Spring Statement into a “full fiscal event”. An emergency Budget in other words.
S&P’s detailed but stark assessment of the consequences of a no-deal Brexit makes it plain why an emergency Budget would be needed.
The credit ratings agency, while noting a no-deal Brexit in March next year is still not its “base case”, warns that this risk has “increased sufficiently to become a relevant rating consideration” and highlights the impasse over the Irish border question in Brexit negotiations.
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Highlighting this increased risk in a paper published on Tuesday, Countdown to Brexit: No Deal Moving Into Sight, S&P says: “Our view reflects the inability thus far of the UK and EU to reach agreement on the Northern Irish border issue, the critical outstanding component of the proposed Withdrawal Treaty.”
S&P warns of a recession lasting four to five quarters in a no-deal scenario, with UK gross domestic product contracting by a cumulative 2.7 per cent over two years. It forecasts the UK would then return to growth but emphasises the pace of expansion would be only “moderate”.
The agency believes UK economic output would, by 2021, still be 5.5% less than it would have been had a deal been struck and a transition arrangement secured. We must not underestimate what 5.5% of lost economic output, over just three years, would look like in terms of the hit to people’s living standards. It is a very big number in an economic context. And S&P warns that most of this loss of about 5.5% of GDP over the three-year forecast period “would likely be permanent”.
S&P also fears that “regulatory and infrastructure challenges, lack of investment, trade bottlenecks, and lower immigration would push down the UK economy’s long-term growth potential”. S&P calculates the country’s direct loss of trade globally could amount to 1.9% of UK GDP during the scenario horizon.
The agency spells out in grisly detail how it believes a no-deal scenario would play out.
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S&P says: “In our scenario, the short-term impact would start with a fall in share prices, a rise in corporate borrowing costs, and a further substantive weakening of sterling in the first quarter of 2019, even before the end of March 2019 as markets start to discount a no-deal Brexit.”
The ratings agency projects “significant disruption and further market volatility” after a no-deal Brexit. S&P warns it is “almost certain” that most goods shipments would be delayed, even if the UK and EU try to limit disruption in critical areas such as customs and transportation. S&P notes such delays would have a particular effect on sectors of the UK economy with supply chains that are integrated heavily with the EU.
It also flags the cost of disruption to the UK financial sector.
And, citing its expectation that sterling would depreciate by 15% initially and that World Trade Organisation tariffs would apply to imports from the EU and countries covered by EU free trade agreements, it sees annual UK inflation peaking at 4.7% in mid-2019.
It warns UK unemployment could rise to more than 7% by early 2020. The rate is currently 4%. And S&P forecasts the income of UK households could decline by £2,700 per year on average over the 2019 to 2021 period. S&P also sees “significant house price declines”. It expects these falls would mean house prices will end up 15% lower than in a scenario where a deal is agreed.
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Fears of a no-deal Brexit have haunted the pound in recent weeks, with Mr Hammond’s jocular Budget address failing to lift sterling.
S&P estimates that a no-deal Brexit would give rise to a recession with damage equivalent to 60 per cent of that wrought by the Great Recession of 2008/09, which was brought on by the global financial crisis.
The horror of the 2008/09 recession will still be unhappily vivid in the memories of millions of people and, in many ways, the UK has never really got over it. You only have to look at how far UK base rates, at 0.75%, are below anything like normal levels to realise these are still very far from normal economic times. And remember we are now more than 10 years on from the collapse of US investment bank Lehman Brothers in autumn 2008, the event which saw the developing global financial crisis blow up dramatically.
So who on earth would volunteer to go through additional damage equivalent to 60% of that endured by the UK population in 2008/09?
No one, you would surely think. And this would be a sensible conclusion. Sadly, however, the arch-Brexiters seem happy the UK population should endure such a hit. It seems that, in their minds, the only thing that matters is, after a Brexit campaign ahead of the June 2016 referendum that was very short indeed on reality, the people “have spoken”. The arch-Brexiters are determined to conclude their ideological crusade, regardless of the cost to ordinary people.
Read More: Ian McConnell: Calamitous no-deal risk grows with Tory Brexit circus in full swing
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