UK GDP will suffer 10.7% hit in worst case no-deal Brexit: report

London

THE UK will suffer a major economic hit if Parliament rejects Prime Minister Theresa May's Brexit deal and the country crashes out of the European Union (EU) with no new trade arrangements in place, according to official analysis.

A government report on Wednesday said GDP will be as much as 10.7 per cent lower over 15 years if there's no orderly exit and the supply of workers from the bloc dries up. The UK will be poorer under all exit options modelled in the study.

While the new analysis paints a dire picture of the worst-case scenario, it does not provide a clear picture of the economic impact of the deal Mrs May finalised with the EU last week. Instead, it provides an analysis based loosely on a plan that's already been rejected by the bloc.

The omission of Mrs May's agreement is likely to be politically awkward for the government, because the numbers are intended to help inform politicians before they vote on whether to accept or reject the deal she has negotiated.

"Our deal is the best deal available for jobs and our economy," Mrs May told Parliament.

If Parliament rejects Mrs May's deal, the UK will be on course to crash out of the EU on March 29 into a legal limbo, with no special rules in place to regulate trade with the bloc. Backers of Mrs May's deal hope the findings in the analysis will bring wavering politicians - especially Conservative rebels - into line.

The government analysed various Brexit scenarios, the report said. Mrs May's "Chequers" plan for close ties to the bloc, which the EU rejected, is the best scenario. GDP would be 0.6 per cent lower over 15 years, or 2.5 per cent if EU migration fell to zero.

The trade deal won't be negotiated until after Brexit day, so economists can't model it. Instead they take a halfway point between Mrs May's ideal plan and a regular free-trade agreement. In that scenario, GDP would be 2.1 per cent lower over 15 years, or 3.9 per cent if EU migration stopped.

The North-East of England, which backed Brexit, would be the region worst hit by a no-deal Brexit.

Reducing net immigration from the EU to the UK would worsen the economic hit from any kind of Brexit. The hit from a no-deal Brexit amounts to about £200 billion (S$352.5 billion) or more than £3,000 per person. The scenarios compare the outcomes against a baseline of remaining in the bloc.

The analysis is almost certain to provoke a backlash from Tory Brexiteers, who say predictions of economic damage are part of "Project Fear" and insist a no-deal Brexit would leave Britain better off.

Mrs May appears to be heading for defeat in the Parliamentary vote on whether or not to back her deal, which will be held on Dec 11, amid massive opposition from pro-Brexit rebels in her own Conservative Party.

They point to Treasury analysis published before the 2016 referendum that warned of a possible recession within two years and a significant rise in unemployment.

As it turned out, unemployment is at a four-decade low and the economy has recorded continued growth, though there is little dispute that investment and consumer spending have been adversely affected by Brexit.

The Treasury has been at pains to make clear that the analysis is a cross-government effort after arch-Brexiteer Boris Johnson privately accused Chancellor Philip Hammond's department of being "the heart of Remain" and trying to ruin Brexit. Mrs May's office on Tuesday said that the work is an analysis rather than an official forecast.

A risk is that the study provides ammunition to all sides in the Brexit debate, including the campaign for a second referendum to reverse Brexit and those pressing for a Norway-style option of keeping close economic ties.

The Bank of England will publish its own analysis later. BLOOMBERG