Accountancy giant forecasts GDP to shrink by 1.5% with business confidence badly dented
Britain will plunge into its first recession in a decade should the government quit the European Union without a deal, according to the latest in a string of gloomy forecasts about the UK’s fortunes outside the EU’s free trade area.
Economists at the accountancy firm KPMG said that the knock-on effects to Britain’s trade and business confidence of a no-deal Brexit would lead to the economy shrinking by 1.5% next year.
Consumer spending, which has provided between 60% and 80% of growth in the economy over the last three years, would also be severely dented.
The warning follows forecasts by the Bank of England and the Treasury’s independent forecasting unit, the Office for Budget Responsibility, which have alerted the government to the negative economic consequences of losing access to the EU single market and customs union overnight.
The central bank and the OBR have predicted a recession in the wake of a no-deal Brexit. KPMG forecasts that securing a deal ahead of the 31 October deadline would have the opposite effect of boosting GDP growth to 1.5% in 2020.
Yael Selfin, KPMG UK’s chief economist, said she expected that in every quarter of next year the economy would contract, leading to the first recession since 2009 and the aftermath of the financial crisis.
“With the Brexit debate poised on a knife-edge, the UK economy is now at a crossroads. It is difficult to think of another time when the UK has been on the verge of two economic out-turns that are so different, but the impact of a no-deal Brexit should not be underestimated,” she said.
“Despite headwinds such as the slowing global economy and limited domestic capacity, the UK economy now has the potential to strengthen over the next 12 months. But a no-deal Brexit could put paid to this upside, triggering the UK’s first recession for a decade.”
The economy has already slowed in recent months, with only the services sector continuing to expand, according to official figures. An industry survey by business advisers BDO found that optimism in the sector fell dramatically last month as the prospect of a recession became a possibility
A survey of more than 4,000 services firms found that optimism was now at levels not seen since 2013.
“The UK’s macroeconomic policy framework has not kept pace with significant changes to our economic environment and is therefore at risk of leaving the country underprepared for the next recession. That is not a risk policymakers should take lightly,” it said.
Governments relied heavily on central banks to rescue their economies during the last recession with moves to lower interest rates and the cost of long-term borrowing by businesses.
The foundation said the Bank of England and other central banks were largely out of firepower, leaving ministers with a significant gap in their armoury should the economy weaken.
To overcome this, the thinktank said the government should move to restore the safety net of benefits that have been cut in the last 10 years and strengthen the remit of the Bank of England to expand credit to households and businesses when the economy contracts.