The United Kingdom is set to leave the European Union on March 29. Crashing out of the bloc without an exit agreement would result in turmoil; striking a deal would minimize damage to the economy.
UBS economists led by Arend Kapteyn say their outlook for the UK economy is “binary.” The disruption to trade caused by a disorderly Brexit would “plunge the UK into recession,” they warn. A deal would postpone difficult decisions and provide certainty to business.
Prime Minister Theresa May has negotiated a divorce deal with the European Union, but it faces long odds in parliament. UK lawmakers are expected to vote on the agreement next month.
Brexit-fueled recession …
Abruptly leaving the European Union without a deal in place would spell disaster for companiesin the United Kingdom. They would face new trade barriers and an uncertain legal environment. Business lobby groups have warned that many companies are unprepared for a messy Brexit.
“The United Kingdom would only have time to reestablish the most critical of the hundreds of international trade and regulatory treaties that it is currently party to via its EU membership,” said Andrew Goodwin, associate director at Oxford Economics.
Government studies predict the UK economy would be 7.7% smaller 15 years after a disorderly Brexit than if it stuck with current trading arrangements. The damage would be even greater if immigration from the European Union drops.
Economists expect the damage to show up quickly.
Research firm Capital Economics forecasts that a disorderly Brexit would lead to the economy shrinking 0.2% in 2019. It said the pound would likely plummet to $1.12 against the dollar, from its current level of $1.26. According to Oxford Economics, the economy would be 2.1% smaller by the end of 2020 than in a scenario where an exit deal is finalized.
… or relief?
While the UK economy would be worse off under all Brexit scenarios studied by the government, agreeing a deal would provide certainty to companies who have spent the past two years in the dark about future terms of trade with the European Union. Business groups have urged UK lawmakers to approve May’s deal.
High levels of uncertainty contributed to a significant slowdown by the UK economy in the second half of this year. Consumer spending and business investment have also taken a hit since voters chose to leave their biggest trading partner in 2016.
“While the long-term risks to UK potential growth from Brexit loom large, the prospect of a deal presents considerable upside potential for the UK economy over the medium-term,” said Kallum Pickering, a senior economist at Berenberg.
Companies that had been most at risk, such as carmakers, would see the greatest benefits from a deal, according to Pickering. Wages would also increase at a quicker pace.
Leaving under May’s deal or crashing out without it aren’t the only options.
There are two more scenarios that would leave the UK economy better off than a disorderly Brexit: Postponing the exit, or calling it off altogether.