A no-deal Brexit would send the pound plunging and trigger a worse recession than the financial crisis, the Bank of England has warned.
Following the publication of the Treasury’s own analysis of the economic impact of various Brexit scenarios, it was the turn of Threadneedle Street to take on the role of doom monger.
It said the UK economy could shrink by 8% in the immediate aftermath of leaving the EU if there was no transition period, creating the worst slump since the Second World War.
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The economic impact could be more severe than during the 2008 financial crisis, when GDP contracted by 6.25%.
Unemployment would almost double, from the current rate of just over 4% to 7.5%, despite a fall in net migration of 100,000. Domestic property prices would fall by as much as 30%, while commercial property prices could plunge by 42%.
The Bank of England also warned the pound could fall by as much as 25%, which would see it be worth less than the dollar.
The Daily Telegraph says “regulations bought in since the financial crisis mean the financial sector is better prepared for such extreme shocks, thanks to bigger capital buffers on their balance sheets”, although the Bank’s Governor Mark Carney, contrasted this with the rest of the economy.
“Evidence from surveys and other UK authorities suggest that the UK is not yet prepared for a cliff-edge Brexit” he said. “Surveys suggest that less than half of businesses have initiated contingency plans for a no deal and less than a fifth of small businesses have done so.”
This is not what the Bank expects to happen, but represents a worst-case scenario, based on a so called “disorderly Brexit”, reports the BBC.
A merely “disruptive” Brexit, where goods still flow across borders but face tariffs and non-recognition of standards, would still cause a 3% fall in gross domestic product.
In either case, Carney has said there are limits to what the Bank of England can do in the event of a Brexit shock to the economy, both in terms of offsetting a fall in demand and ensuring the country’s banking industry was able to continue lending.
The most likely scenario would result in the Bank having to hike interest rates to 5.5% in order to compensate for a sudden supply shock, the Telegraph says.
Carney has long been targeted by Brexiteers as one of the architects of Project Fear, for his repeated warnings about the economic dangers of leaving the EU.
The former Goldman Sachs banker “angered many eurosceptics before the 2016 Brexit vote by warning of a hit to economic growth from a decision to leave the EU”, Reuters says.
However, his doomsday forecasts were given fresh impetus after five former cabinet ministers wrote to Theresa May warning her she is heading for a ‘no deal’ Brexit unless she changes course.
In an open letter published by HuffPost UK, ex-Tory leader Iain Duncan Smith, David Davis, Priti Patel, Owen Patterson and John Whittingdale join Jacob Rees-Mogg in demanding that the prime minister abandon her plans, or face heavy defeat in the Commons.
“Our grave doubts about this proposal are shared across the House of Commons by members of all parties,” the letter states.
“By continuing to pursue it – when it is plain that it does not have enough votes to carry it through the House of Commons – you are making a ‘no deal’ scenario more likely”.
