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No-deal Brexit could trigger a recession next year

No-deal Brexit could trigger a recession next year

“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", Yael Selfin comments.

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  • KPMG forecasts GDP growth of 1.5% for 2020 with Brexit deal, but a no-deal could see a decline of 1.5%.
  • No-deal Brexit threatens household sentiment, business investment and cross-border trade, with policymakers lacking the means to fully mitigate negative impacts

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.

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.”

KPMG’s September forecasts for the UK economy

  2018 2019 2020
    Deal No-deal  Deal No-deal 
GDP 1.4 1.3 0.9 1.5 -1.5
Consumer spending 1.8 1.9 1.1 1.6 1.2
Investment 0.2 0.6 0.5 2 1.7
Unemployment rate 4.1 3.9 4 3.8 4.8
Inflation 2.5 1.9 2.1 2 2.4
Base interest rate 0.75 0.75 0.1 1 0.1

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.”

 

-ENDS-

 

For media enquiries, please contact:

Ross Williamson, Kekst CNC

T: +44(0) 7904 994 970

E: Ross.Williamson@kekstcnc.com

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KPMG Press Office: +44 (0)207 694 8773

 

Notes to Editors:

* Figures for deal scenario incorporate the government’s stated preference to leave the EU on 31 October 2019 under the terms of a withdrawal agreement. No-deal figures represent a scenario where the UK leaves the EU without a deal on 31 October 2019.

 

About the research

The forecasts were produced by the KPMG macroeconomics team using a suite of external and in-house models capturing the main inter-relationships in the UK economy. As with all forecasts, these are subject to considerable uncertainty and the outturn may differ significantly. For more details, please see the full “Economic Outlook” at: www.kpmg.com/uk/economicoutlook

 

About KPMG

KPMG LLP, a UK limited liability partnership, operates from 22 offices across the UK with approximately 16,300 partners and staff.  The UK firm recorded a revenue of £2.338 billion in the year ended 30 September 2018. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. It operates in 154 countries and has 200,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity.  Each KPMG firm is a legally distinct and separate entity and describes itself as such.

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