No-deal Brexit could trigger a recession next year, warns KPMG

9 September 2019

An orderly departure from the European Union on 31 October is expected to help the UK economy rebound, with GDP growth reaching 1.5% in 2020, but a no-deal Brexit could prompt a four-quarter recession, with GDP contracting by 1.5% next year, according to KPMG UK’s latest quarterly Economic Outlook.

 
  • No-deal Brexit threatens household sentiment, business investment and cross-border trade, with policymakers lacking the means to fully mitigate negative impacts
  The analysis finds that a Brexit deal which finally resolves some of the uncertainties about the UK’s future trading relationship with the EU, could lead the UK economy to perform better in 2020 than previously expected (upgraded by 0.2% to 1.5% since the publication of KPMG’s last Outlook). This is despite constraints such as a slowing global economy.  However, trade disruption under a no-deal would damage UK businesses, while potential shortages of imported foods and medicines are likely to undermine consumer confidence. Yael Selfin, Chief Economist at KPMG UK, commented on the report: “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 outturns that are so different, but the impact of a no-deal Brexit should not be underestimated. “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.”  Table 1. KPMG’s September forecasts for the UK economy
 201820192020
  DealNo-deal DealNo-deal
GDP1.41.30.91.5-1.5
Consumer spending1.81.91.11.61.2
Investment0.20.60.52.01.7
Unemployment rate4.13.94.03.84.8
Inflation2.51.92.12.02.4
Base interest rate0.750.750.11.000.1
Source: ONS, KPMG forecasts, with no-deal forecasts based on OBR modelling. Average % change on previous calendar year except for unemployment rate, which is average annual rate. Investment represents Gross Fixed Capital Formation, inflation measure used is the CPI and unemployment measure is LFS. Interest rate represents level at the end of calendar year. Brexit deal to boost investment, but no deal would damage trade According to the Outlook, a deal could prompt an appreciation of the pound by as much as 15% and enable businesses to recommence their investment plans. With a strong labour market providing support for further consumer spending, the UK economy has the potential to then perform more strongly in 2020, even though a Brexit deal is unlikely to resolve all the outstanding questions about the UK’s ongoing relationship with the EU. Conversely, the analysis suggests a no-deal Brexit could significantly dent exports in 2020 amid delays at the border and confusion over regulation. While both the Bank of England and the UK Government would be likely to offer monetary and fiscal policy support, their headroom for action is limited. Household sentiment would also undoubtedly suffer, hitting consumer spending, which has been so important to the UK economy over the past year, while business investment would remain depressed. 
Yael Selfin, Chief Economist at KPMG UK, concludes: “A no-deal Brexit would be a leap into the unknown for the UK economy and the consequences are therefore unpredictable, but even the foreseeable downside risks from no deal are substantial. “By contrast, a last-minute Brexit deal and a transition period as the UK leaves the EU would give the UK economy some breathing space, enabling businesses to restart investment plans and pave the way for stronger growth.”
 


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