Bank of England Warning Over Worst-Case Brexit ‘No-Deal’

November 29, 2018 Updated: November 29, 2018

LONDON—The worst-case Brexit “no-deal” scenario could plunge Britain into dire economic straits, worse than those brought on by the global financial crash a decade ago, according to the Bank of England.

The doom-and-gloom scenario isn’t a prediction, but the worst possible outcome of a “disorderly” no-deal Brexit, laid out by the central bank as part of a government-sanctioned analysis.

The Bank of England (BoE) warned that the economy could shrink by as much as 8 percent in a year, and, in the case of a disorderly no-deal, 25 percent could be wiped off the value of the pound.

The analysis, published Nov. 28, was part of a broader stress test to see how well-prepared Britain is to weather the worst possible financial storms that could be whipped up by various factors in years to come, including Brexit.

The Bank of England in London's financial district during rainy weather
The Bank of England in London’s financial district during rainy weather on Sept. 23, 2018. (Reuters/Henry Nicholls)

The central bank concluded that Britain’s banks were in good shape, ready to handle whatever Brexit throws at them.

The government’s own analysis of the financial impact of Brexit, published the same day, concluded that a no-deal Brexit could knock 9.3 percent off GDP over 15 years.

‘A Bleak Picture’

Businesses, representatives, and analysis have been warning of the perils of a no-deal Brexit for months, with the markets spooked by the prospect.

Rain Newton-Smith, Chief Economist of business organization the CBI, said, “These forecasts paint a bleak picture over the long-term of a no-deal Brexit or a Canada-style deal. It surely puts to bed some of the more far-fetched ideas that a hard-landing Brexit will not seriously hurt the economy.”

Britain's Prime Minister Theresa May leaves the BBC, after taking part in a live radio phone-in, in central London
Britain’s Prime Minister Theresa May leaves the BBC in central London on Nov. 23, 2018. (Toby Melville/Reuters)

With lawmakers poised to vote on whether to accept Prime Minister Theresa May’s controversial Brexit deal with the EU, supporters of a clean break with the bloc have accused the BoE of stoking “project fear,” of trying to push lawmakers to May’s deal or toward avoiding Brexit.

But BoE Governor Mark Carney denied the charge of scaremongering.

“Parliament has demanded this analysis,” he told a news conference. “It’s not supposed to make people scared, it’s supposed to provide reassurance that, even if this happened, which is not likely, the system is more than ready for it.”

“Our job is not to hope for the best but to prepare for the worst,” he said.

After two years, the divorce papers between the EU and the UK have finally been drawn up, and are ready to be signed—in the form of a vote by British lawmakers on Dec. 11.

All Bets Are Off

That deal would set the UK down a particular Brexit path—a transition period maintaining the status quo on some elements, notably customs. But with lawmakers broadly expected to overturn May’s tiny majority in parliament and reject the deal for ceding too much power to the EU, all bets are off.

If lawmakers reject May’s deal, the possible outcomes include: The UK leaving the EU without a deal in place, meaning they have to trade on Word Trade Organization rules; lawmakers putting the matter to the British people in a second referendum that could include abandoning Brexit; a renegotiation with the EU; or a delay to Brexit.

Anti Brexit demonstrators union flags
Anti-Brexit demonstrators wave EU and Union flags opposite the Houses of Parliament in London on June 19, 2018. (Henry Nicholls/Reuters)

All forms of Brexit will have a negative impact on the economy, compared to remaining within the 27-member trading bloc, according to the government’s own analysis, published the same day as the bank’s report.

That analysis shows that a no-deal Brexit could have a 9.3 percent aggregate reduction on GDP over 15 years. May’s deal comes out top, but it still loses 3.9 percent GDP compared to a no-Brexit status quo.

In a no-deal Brexit the UK leaves without a bespoke deal and must default to WTO trade terms in the shorter term. But it could mean a “disorderly” Brexit, as the UK severs itself overnight on March 30 from the vast regulatory framework with the EU that includes everything from workers rights, advertising regulations, to trade and customs.

The BoE identifies the worse case scenario as a “disorderly” no-deal Brexit that grinds border traffic to a halt and drains financial markets of confidence in British institutions.

The result would be to drag the pound down almost to parity with the dollar, pull house prices down by 30 percent, and to drive inflation to a 6.5 percent spike.

A merely “disruptive” Brexit, where goods continue to flow across borders but face tariffs and other barriers, would mean a 3 percent decline in GDP, according to the report.

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