How would a no-deal Brexit affect the UK economy?

Any disruption would hit trade in food hardest with perishable goods vulnerable to brief delays

Britain's big decision on a no-deal Brexit is looming this month. But there is no consensus on how leaving the EU without an agreement would affect the economy - or even on what no deal really means.

If MPs reject Theresa May’s Brexit agreement again, the UK prime minister has promised them a vote on a no-deal exit by March 13th at the latest. Assent to such a course would imply leaving the EU without an agreement on March 29th - in less than four weeks’ time.

The pro-EU camp says no deal would lead to gridlock on the roads and shortages of food and medicine as Britain enters a siege economy. By contrast, some Brexiteers view a no-deal outcome as a blessing that would allow the country to fast-track increased trade with the rest of the world.

Mark Carney, Bank of England governor has taken a middle view, saying that a no-deal, no-transition Brexit would, “by clear orders of magnitude”, be “materially” worse for Britain’s economic outlook than the bank’s current forecasts.

Companies have told the bank’s agents they would expect “a sharp fall in output, a sharp fall in employment, a sharp fall in exports...and a sharp increase in prices”, he added.

However, economists are wary of forecasting how far the disruption would hit growth because the extent of any damage would depend on decisions made by Brussels, London and the 27 remaining EU governments.

This is how no deal would affect three vital sectors this year. The analysis indicates that predictions of chaos are likely to prove an exaggeration, but that disruption is almost certain. There would be ripple effects across the economy.

Ports

Doom-laden no-deal forecasts are generally predicated on gridlock at Britain's ports, particularly at Dover, the gateway to the short sea crossing to the Pas-de-Calais. But Brussels has acted to reduce disruption, announcing unilateral measures that would give UK road hauliers point-to-point access to EU markets for the rest of 2019.

That would not guarantee smooth flow at the ports, but some developments would help. Large carmakers have rescheduled planned annual shutdowns to April to avoid potential bottlenecks. HM Revenue & Customs has waived safety and security declarations for British imports and temporarily simplified plans for customs declarations.

These steps have not yet been reciprocated by the EU27. Anna Jerzewska, a customs specialist, said: “The simplifications are only partial and I wouldn’t be able to say they will eliminate bottlenecks.”

The biggest problem would be companies’ lack of experience in filling out complicated customs declarations. Much of the paperwork would also be new to customs officials. Rod McKenzie, head of public affairs at the Road Haulage Association, said: “In no way are we ready for a no-deal Brexit.” If queues materialised, even those with impeccable documentation would not be able to speed across the Channel.

There are also too few customs clearance agents and freight forwarders to help ease trade. Aline Doussin, partner at the law firm Hogan Lovells, said: “We see lots of traders fighting to make sure they will be first in the queue to have their goods transported.”

Food

Any disruption would hit trade in food hardest, because it is the sector with the highest tariffs and some of the most onerous regulations - with perishable goods vulnerable to brief delays.

Supermarkets and their suppliers have been doing what they can to stockpile - but there is little they can do to stop lettuces wilting and strawberries rotting if the crucial Dover-Calais route clogs up.

Consumers could also face steep price rises on meat and dairy products due to the British government’s plans to impose duties to protect sensitive farming sectors. If people start panic buying it could ensure empty shelves.

Food exporters are particularly in the line of fire. Meat and dairy farmers could initially be unable to sell any meat at all in the EU, which imports animal-based products only from approved countries. A UK application to sell such products could be waved through - or it could take weeks or months.

The next challenge is the sheer volume of inspections required to police EU food standards. The UK does not have enough vets authorised to conduct inspections; the EU’s network of border inspection posts does not yet include either Dover or Calais. France is recruiting customs agents and building new posts but is far from ready. All this is on top of EU tariffs on third countries that could price UK producers out of mainland European markets - averaging about 70 per cent on beef and 45 per cent on lamb exports.

Services

For services, which make up 80 per cent of the British economy, the chief concern is whether a no-deal Brexit simply wipes out some existing British business activities in the EU and puts new opportunities beyond reach.

“In certain areas, trade will be impossible, not just more expensive,” said Alan Winters, director of the UK Trade Policy Observatory at the University of Sussex.

The UK and the EU27 states have taken action to ensure existing financial services contracts would be valid, to dispel worries that a no-deal Brexit would trigger an immediate financial crisis. London would still be set to lose some financial services business that it would have otherwise won but the economic consequences of this would not show up immediately.

In another move to reduce no deal’s impact on the services market, the UK has recognised EU-acquired professional qualifications - but the bloc has not reciprocated.

This potentially creates severe problems, for international lawyers, accountants, architects, doctors and nurses, among others. Companies providing short-term consultancies would need business visas to operate within the EU rather than simply putting staff on a plane.

Another big concern is the flow of data. To conform with EU regulations, data flows to the UK would be prohibited unless contracts were revised to included specific permissions. Hundreds of thousands of contracts could be affected and many companies would simply not be ready, said Giles Derrington, associate director of policy at TechUK, the trade body for the tech industry.

Policy response

The Bank of England has acknowledged it would be likely to cut interest rates to lessen the shock of a disruptive Brexit, with Mr Carney telling MPs “we will deliver all the stimulus we can subject to delivering price stability”. But he added: “We shouldn’t oversell what we can do.”

Rate cuts could help reduce or prevent a slump in demand, if disruption hit business and consumer confidence. But monetary policy cannot help if the problem is chiefly on the supply side - it cannot help ease bottlenecks at Dover. In that case, lower interest rates would simply fuel inflation, compounding the effects of a likely fall in sterling.

Since interest rates are already low, the Institute for Fiscal Studies argued last month “there may be a strong case for some sort of fiscal stimulus” to help maintain demand. It suggested a temporary cut in VAT as one of the most effective ways to support spending by lower income households.

Philip Hammond, chancellor, has already indicated that the relatively healthy state of the public finances could allow him to provide some support to the economy if needed. – Copyright The Financial Times Limited 2019