Britain’s next prime minister will take charge of an economy beginning to falter, as Brexit uncertainty and the mounting risk of a no deal scenario serve as a brake on growth, according to a Guardian analysis.
As the Conservative leadership race reaches an acrimonious finale, the sugar hit for the economy from the stockpiling rush before the original Brexit deadline has run its course, with warning signs emerging that growth will flatline.
The prospect of Boris Johnson or Jeremy Hunt allowing the country to walk away without a withdrawal agreement in place on 31 October has alarmed business groups and has put renewed pressure on the pound. Johnson has made clear that he will use the nuclear option if necessary, in a move observers warn could crash the economy into recession.
Writing in the Guardian, Andrew Sentance, a former member of the interest rate-setting monetary policy committee (MPC) at the Bank of England, said companies would want a safe pair of hands running Britain, rather than the “erratic” Johnson.
“The political world is in turmoil and the idea that Boris Johnson will become our prime minister fills me – and many other businesspeople – with horror,” he said.
David Blanchflower, another former member of the MPC, also writing in the Guardian, said either Johnson or Hunt taking Britain out of the EU without a deal would damage living standards.
“Discussions of who will be prime minister are increasingly looking like a clown show, and as far as discussions of economics go, they are basically in fantasyland,” he said.
In a ‘no deal’ scenario, the UK would leave the single market and the customs union immediately with no ‘divorce’ arrangement in place. The European Court of Justice would cease to have jurisdiction over the UK, and the country would also leave various other institutions including Euratom and Europol.
The UK would no longer be paying into the EU budget, nor would it hand over the £39bn divorce payment. There would be no transition period. Free movement of people into the UK from the EU27 would stop.
Trade between the UK and the EU would be governed by basic WTO rules. The UK government has already indicated that it will set low or no tariffs on goods coming into the country. This would lower the price of imports - making it harder for British manufacturers to compete with foreign goods. If the UK sets the tariffs to zero on goods coming in from the EU, under WTO ‘most favoured nation’ rules it must also offer the same zero tariffs to other countries.
WTO rules only cover goods - they do not apply to financial services, a significant part of the UK’s economy. Trading under WTO rules will also require border checks, which could cause delays at ports, and a severe challenge to the peace process in Ireland without alternative arrangements in place to avoid a hard border.
Some ‘No Deal’ supporters have claimed that the UK can use Article 24 of the General Agreement on Tariffs and Trade (Gatt) to force the EU to accept a period of up to ten years where there are no tariffs while a free trade agreement (FTA) is negotiated. However, the UK cannot invoke Article 24 unilaterally - the EU would have to agree to it. In previous cases where the article has been used, the two sides had a deal in place, and it has never been used to replicate something of the scale and complexity of the EU and the UK’s trading relationship.
Until some agreements are in place, a ‘no deal’ scenario will place extra overheads on UK businesses - for example the current government advice is that all drivers, including lorries and commercial vehicles, will require extra documentation to be able to drive in Europe after 31 October if there is no deal. Those arguing for a ‘managed’ no deal envisage that a range of smaller sector-by-sector bilateral agreements could be quickly put into place as mutual self-interest between the UK and EU to avoid introducing or rapidly remove this kind of bureaucracy.
To gauge the impact of Brexit on a monthly basis, the Guardian monitors eight economic indicators, along with the value of the pound and the performance of the FTSE 100.
Economists made forecasts for seven of those barometers before their release, and in three cases the outcome was worse than expected. In three cases, better. One met its forecast.
Since the Brexit vote three years ago this month, the cost to the economy from lower economic growth than would have otherwise been the case under a remain vote has reached £40bn, or about £800m a week of lost income – more than double the £350m figure printed on the side of the Vote Leave battlebus used by Johnson.
The economy has not, however, collapsed into recession, as predicted by the gloomiest forecasts made ahead of the EU referendum, while unemployment has dropped to the lowest level since the mid-1970s and average workers’ wages have accelerated at the fastest annual rate since the financial crisis.
But storm clouds are beginning to emerge after jobs growth slowed markedly over the three months to April. Average wages after inflation remain below the level recorded before the 2008 crash, while consumer spending dropped in May, driven by cold weather and Brexit concerns.
Fuelled by rising numbers of self-employed people and women entering the workforce, employment in Britain increased by 32,000 to reach a record high of 32.75m, according to the Office for National Statistics.
The rise was the weakest since August 2018 and significantly down on the 99,000 added to the workforce in March, suggesting that Brexit-related uncertainty is beginning to make companies more cautious about hiring.
Economic growth in Britain had raced ahead earlier this year, driven by a stockpiling rush as companies scrambled to prepare for no-deal Brexit ahead of a 29 March deadline, before Theresa May extended the process until the autumn.
GDP growth reached 0.5% in the first quarter. However, the Bank of England warned this month the economy would flatline in the second quarter, slashing its forecast to zero from a previous estimate of 0.2%.
Threadneedle Street warned that some companies would run down their emergency stockpiles over the next few months rather than place new orders, serving as a brake on growth. The Bank’s network of regional agents said firms are as ready as they can be for Brexit, but that a lack of clarity from Westminster stops them from feeling fully prepared.
In an early sign of the slowdown, GDP plunged by 0.4% in April from a month earlier as factories launched a wave of planned shutdowns around the time of the 29 March Brexit deadline.
Blanchflower said: “We should expect an impact over the coming months even if no deal is avoided. The Bank expects zero growth in the second quarter, but it might well even be negative.”
