No-deal Brexit would wipe 2% off coronavirus-hit UK economy in 2021 – OBR

A no-deal Brexit is forecast to wipe 2% off the economy next year and lead to a long-term decline in gross domestic product (GDP), according to the latest analysis.

Trade talks between the UK and the European Union continue to be deadlocked as the December 31 cut-off date looms closer.

If there is no agreement by the end of the year then the UK is set to revert to World Trade Organisation terms with its largest trading partner, a move the Office for Budget Responsibility (OBR) has forecast could “reduce real GDP by a further 2% in 2021”, on top of the havoc wreaked by coronavirus.

The economic shock of the “various temporary disruptions to cross-border trade and the knock-on impacts” would continue for years to come, it predicted.

In its analysis, published to coincide with Wednesday’s Spending Review, the OBR said: “As these abate, the longer-term effects of lower trade intensity continue to build such that output is 1.5% lower than our central forecast after five years, and 2% lower in the long run.”

Employment would also suffer in the event of a no-deal outcome, it predicted.

The OBR forecasts that unemployment will peak at 8.3% in the third quarter of 2021 if there is no agreement – 0.9% higher than in its central forecast for the quarter.

Even with a free trade agreement in place with Brussels, the OBR has held to its previous forecast that Brexit would “lower both export and import intensity over time”, and that productivity would drop by 4% in the long term compared with if the UK had remained a member of the EU.

In an update to MEPs, European Commission president Ursula von der Leyen said there was still no clarity on whether a deal would be signed.

“I cannot tell you today if in the end there will be a deal,” she said.

The OBR said it was not satisfied that businesses or Government was ready for the changes Brexit would bring even if the current negotiations prove fruitful.

“We continue to assume that the UK and EU conclude a free trade agreement and that there is a smooth transition to the new trading relationship after the transition period ends on December 31 2020,” it said.

“However, there is evidence that neither the Government nor businesses are fully prepared for the imminent changes even if a deal is agreed.

“For example, the Bank of England’s decision maker panel survey for October reports that over a third of firms are either only partially prepared or not prepared at all.

“If an agreement is successfully concluded, we assume that officials on both sides of the border will display a degree of discretion in order to minimise disruption to trade.”