No-deal Brexit could have severe short-term impact, budget watchdog says

By David Hughes, Press Association Chief Political Correspondent

The UK's economy and public finances are likely to be weaker as a result of the Brexit vote than they would have been if the country have decided to stay in the European Union, according to the Budget watchdog.

The Office for Budget Responsibility (OBR) also indicated that a no-deal Brexit could have a "severe short-term impact" on the economy and potentially lead to a sharp fall in asset prices.

The OBR discussion paper said: "We cannot know for sure what would have happened had the vote gone the other way, but it seems likely that the economy and public finances have been weaker than they otherwise would have been."

It noted that academic studies attempting to compare the UK economy following the Brexit vote with countries which had a similar profile in the years before 2016, indicated "output in mid-2018 is around 2% to 2.5% lower than it would have been in the absence of the referendum".

The OBR paper, which sets out some of the judgments the body will have to make as it incorporates the impact of Brexit into its forecasts, said there were several factors behind the UK's "recent relative weakness of growth".

"Business investment appears to have been depressed by uncertainty regarding the outcome of the negotiations, while the prospect of worsened access to foreign markets has pushed the exchange rate lower, raising inflation and reducing the contribution to economic growth from real consumer incomes and spending," it said.

A partial boost to trade as a result of sterling's weakness was limited by the international nature of supply chains, "uncertainty for exporters" and resilient consumer demand for imported goods.

The OBR's current forecasts assume an "orderly" end to the Brexit negotiations and a "smooth" transition, but crashing out without a deal "is not impossible".

On the potential for a "disorderly" no-deal Brexit, the OBR said "it could have a severe short-term impact on demand and supply in the economy and on the public finances".

"UK asset prices could fall sharply which, together with heightened uncertainty, would cause households and businesses to rein in their spending.

"A fall in the pound would also raise domestic prices, squeezing households' real incomes and spending."

There could be "temporary constraints on supply if, for instance, a lack of customs preparedness led to significant delays at the border".

Should "bottlenecks" at customs turn out to be significant, it might prompt households and businesses to attempt to stockpile goods in advance, which would further aggravate shortages.

It was "next to impossible" to assess the potential impact of a disorderly Brexit, the OBR paper said, but added that "while not a direct parallel, it is worth noting that the 'Three-Day Week' introduced in early 1974 in response to energy shortages and increased militancy on the part of the miners, was associated with a fall in output of a little under 3% that quarter".

Brexiteers have claimed that the freedom to strike trade deals around the world is one of the main benefits of leaving the EU.

But the OBR appeared to question how much of an impact that would have, at least in the medium-term.

It said most studies of the impact of Brexit conclude that increased trade barriers will leave output in both the UK and EU lower than would otherwise have been the case and "the scope for trade deals with non-EU countries to offset these effects is likely to be limited".