Prominent think-tank says no-deal Brexit may not be catastrophic

London, United Kingdom – As the clock ticks down on the UK’s pending divorce from the EU, an influential British think-tank said on Wednesday that it is possible for Britain to avoid a recession should it crash out of Europe without a deal in place. 

In its last quarterly forecast before Britain’s scheduled March 29 departure from the EU, the National Institute of Economic and Social Research, (NIESR) said that while economic growth would hover near zero in the two years following a no-deal Brexit, Britain could avoid sliding into recession if inflation and wage growth stay in check and policy makers respond with measures to support the economy.

If Britain leaves the EU without a deal, trade between the two would revert to rules under the WTO.

Absent contingencies, the flow of goods and services would slow and in some cases be blocked, denting business and consumer confidence as well as economic growth.

“One way you could think about it, is the UK being completely isolated the same way that Iceland was isolated when the volcano erupted. There’s major disruption,” Amit Kara, NIESR’s head of UK macroeconomics and one of the authors of the report, told Al Jazeera.

“That’s the extreme version. The scenario we’re painting is one where contingency measures are activated,” Kara added.

There will be disruptions. We’re just suggesting that it’s not catastrophic.

Amit Kara, NIESR’s head of UK macroeconomics

These measures could include the Central Bank injecting liquidity into the banking system and establishing swap lines with other central banks the rights of UK and EU citizens remaining protected, air transport continuing to operate unhindered, and truckers lorry drivers continuing to work and transport goods. 

The UK and the EU have said they will activate some of these contingency measures in case of a no deal.

“There will be disruptions. We’re just suggesting that it’s not catastrophic,” said Kara. “Provided contingency plans are activated and the Central Bank and the fiscal authority inject stimulus into the economy, which we expect they will, [our projections show] the economy does slow down but doesn’t absolutely collapse.” 

NIESR said for this scenario to materialise inflation expectations have to remain anchored, giving Britain’s  Central Bank room to maneuver and avoid raising interest rates. Higher interest rates cool economic activity. 

Uncertainty has intensified as Brussels and London remain locked in a standoff over Britain’s withdrawal agreement, which the British parliament voted down on January 15 in a historic defeat for Prime Minister Theresa May. 

NIESR noted that heightened Brexit uncertainty combined with slowing global growth has caused the UK economy to lose momentum since its last forecast. The institute now predicts the UK economy will grow 1.5 percent this year, as opposed to its previous estimate of 1.9. 

That forecast is conditioned on a soft Brexit in which the UK and EU strike a deal to maintain a high level of market access for goods and services to each other’s markets during and after a transition period. 

NIESR noted the slowdown in Britain’s economic activity is happening “in the context of record levels of employment, rising wage growth and public finance data that continues to surprise to the upside.” 

The Bank of England warned in November that a no-deal Brexit would lead to an immediate economic crash, with GDP falling by 8 percent and unemployment rising to 7.5 percent from 4.1 percent. These forecasts were criticised by some economists as too gloomy.

Kara is keen to clarify that contingency plans “are at best mitigating.”

“They’re not going to prevent or stop the long term adjustment to a lower level of GDP,” he said. “In the long run, we do believe the economy will be damaged.”

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