The UK Economy is Not Ready for Brexit

Contingency Planning May Not Avert Economic Chaos

The past two weeks have been some of the most tumultuous weeks for Brexit after British Prime Minister, Boris, Johnson, made the decision to suspend Parliament for a month starting next week - a move edged the UK closer to a “no-deal” Brexit come the October 31 deadline. Johnson’s actions sent the pound tumbling. It fell 0.7% against the dollar and 0.6% against the euro last Wednesday as markets feared that Britain would leave the EU without a deal.  Sterling has plunged whenever the prime minister has talked up the chance of such a scenario and has been driven back up again whenever there are any signals of progress towards an agreement with Brussels. 
 
Since then, the embattled PM has been repeatedly defeated at Westminster, lost his majority, failed to call a snap election, expelled 21 of his MPs and watched his own brother walk out his government. The passage of a new law through parliament on Friday to block a no-deal Brexit was the latest blow to the embattled PM and paves the way for a snap general election and requires Johnson to ask for an extension to the UK's departure date to avoid a no-deal Brexit on 31 October. But the PM has said he would " rather be dead in a ditch" than as for a delay.
 
While how exactly Britain will depart from the EU is unknown, the evidence is already clear that as Britain has moved closer to a hard or no-deal Brexit, the damage has intensified and there is reason to expect stormy economic weather this autumn. For the past three and half years, the public has watched as the majority of economists, experts, government departments, the civil service, NGO’s, economic and social commentators have presented sober warnings about the negative impact of leaving the EU.  
 
CONTINGENCY PLANNING
 
Warnings about an impact of no-deal were leaked last month and revealed concerns that there will be medicine shortages as increased customs controls at ports could disrupt the supply of drugs and the chemical compounds needed to produce them. Almost 75 percent of medicines come from, or via, the EU. The secret document also said the UK would face food shortages and that hundreds of thousands of people could be left without clean eater.  Tory critics said the secret Operation Yellowhammer files, penned by civil servants when Theresa May was PM, were out of date because Johnson had stepped up no-deal planning. They claimed the documents had been leaked by no-deal opponents in an extension of the ‘project fear’ campaign –” - a term used by hard Brexiteers to dismiss downbeat economic forecasts. But a senior Whitehall source told The Sunday Times: ‘This is not project fear - this is the most realistic assessment of what the public face. There are likely, basic, reasonable scenarios.” 

This week minister for no-deal planning Michael Gove pulled plans to publish a “watered down” version of Operation Yellowhammer, after ministers decreed that the findings would still alarm the public. Although officials working on the rewrite said the paper had been deliberately “neutralised” it was still seen as too gloomy for publication to the general public.

Alongside the overarching no-deal Brexit contingency plan, the government has been scaling up preparations for no-deal. A week after taking office, Prime Minister Boris Johnson pledged an extra £2.1bn specifically to prepare for leaving the EU without a deal. Prior to this, the government led by Theresa May had promised £4.2b. to prepare for a range of Brexit scenarios. The shadow chancellor, John McDonnell labelled the sum set aside for no-deal planning as an “appalling waste of taxpayers’ cash”.

ON THE BRINK OF RECESSION

What it seems like a lot of money - £6.3bn in total so far this year - when looked at against the backdrop of the gloomy economic forecast, the hefty sum feels like small change compared with what the government and businesses will have to spend to mitigate the long-term impact it will have on the British economy. The Office for Budget Responsibility (OBR) has forecast that a no-deal would plunge Britain into recession, sending unemployment soaring above 5 percent and house prices collapsing by 10 percent. “This will translate into hundreds of thousands more people losing their jobs; small businesses going bankrupt; people who already struggle to pay the mortgage finding themselves trapped in negative equity. And it’s going to be those areas of the country hardest hit by decades of deindustrialisation and the financial crisis that will feel the economic pain of no-deal most sharply,” Sonia Sodha wrote in The Guardian. 

Based on assumptions that a no-deal would cause a recession, the OBR said in July that borrowing would be almost £60bn if the UK leaves without a deal - up from £29.3bn if it does get a deal. The forecast used by the OBR is less severe than those of the Bank of England and the Treasury. In November, the Bank said a no-deal outcome could send the pound plunging and trigger a worse recession than the 2008 financial crisis. The Treasury meanwhile has predicted a £90bn hit to the economy by 2035 - although prominent eurosceptics dispute this view. In a comment piece for the Telegraph newspaper earlier this week, Conservative backbencher Jacob Rees-Mogg called the forecast "silliness", adding that a no-deal scenario could instead boost the economy by £80bn.

News from the Office for National Statistics of the first fall in quarterly GDP in six and a half years sparked immediate speculation that a further bout of Brexit jitters leading up to the new 31 October departure date could lead to a second successive quarter of negative growth – the technical definition of a recession. The performance of the economy in the second three months of 2019 was much worse than most experts had predicted. It followed growth of 0.5 percent in the first three months of the year when the economy received a boost from unprecedented stockpiling by manufacturers in the run-up to the initial Brexit deadline of 29 March.

A Bank of England study this week estimated the UK has already forfeited 3 percent of national income in the three years since voting to leave the EU and new Research by The UK in a Changing Europe, which analysed the effects of trading with the EU on WTO terms, found that after 10 years this would reduce the UK’s per capita income by 3.5 percent and 8.7percentt; other credible analyses come to much the same conclusion. “Such a large economic impact would also have major implications for the public finances. These would far outweigh any gains resulting from reduced EU contributions,” the report said. The Institute for Fiscal Studies has estimated that if the impacts on GDP were as estimated above, then in a no-deal scenario the cost to the public finances would be between 1% and 3.1% of GDP, and between 0.4% and 1.8% if the deal was implemented. This is even after taking account of the long-term saving on the UK’s net EU contributions of 0.4 percent of GDP. 

One of the most dangerous unknowns is what will happen to the island of Ireland. According to Oxford Economics, Ireland’s economy would be among the worst-hit victims if the UK crashes out of the EU as it could lose 2 percent to 2.5 percent of GDP by 2030 to losses in trade. The UK and Ireland trade heavily through the border of Northern Ireland. The government has said that it will not apply checks and tariffs at the Irish border – a stance which is at odds with its commitments under, inter alia, WTO rules. The EU, however, has made it clear it intends to apply the rules, though whether all checks will be imposed from day one is less obvious. 

BUSINESSES 'CAN NEVER BE READY FOR NO DEAL

Uncertainty over Brexit has prevented business investment growth for the four years since parliament passed a law requiring a referendum and productivity levels have been falling. Businesses have consistently lobbied for a transition period during which trade will continue as now while the two sides negotiated a future relationship and were quick to respond to Johnson’s plans to suspend parliament last week, warning that more political chaos will cause further damage in a country already on the brink of recession. 

In a pointed rebuke to Boris Johnson’s Brexit strategy, the British car industry said last month, so far as it is concerned, “you can never be ready for no deal.” Chief executive of the UK’s Society of Motor Manufacturers and Traders (SMMT), also reposted that UK car production in the first half of 2019 is down by a fifth on the same period last year, while investment is at standstill.  He also warned that the industry in the UK has already spend more than £330m on contingency planning for a no-deal, increasing stockpiles of parts, insuring against losses, and so on. 

A report by the CBI, the UK’s biggest business group, showed that businesses have spent billions on contingency planning but remain hampered by unclear advice, timelines, cost, and complexity.  The analysis showed that every part of the economy is severely unprepared for a no-deal Brexit and said that while the UK’s preparation to date are welcome, the unprecedented nature of Brexit means some aspects cannot be mitigated. The business group used to the report to urge the UK and the EU to capitalise on the new political dynamic presented by the appointment of a new Prime Minister to work toward an agreement.
 


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