No Brexit Deal ‘Worst-Case Scenario’ for U.K. Economy, CEP Says

  • Trading under WTO rules would knock 3% off income per capita
  • Theresa May has said ‘no deal is better than a bad deal’

Projection Shows U.K. Conservatives May Lose Majority

No Brexit deal may be the worst-case scenario for the U.K. economy.

According to the Centre for Economic Performance, leaving the European Union with no pact in place would have twice the negative economic impact as remaining in the single market. That’s at odds with Prime Minister Theresa May’s repeated assertion that “no deal is better than a bad deal.”

“While it is a tautology that a sufficiently bad deal must be worse than no deal, in practice the no-deal outcome, where the U.K. and EU trade under WTO terms, is the worst-case scenario for the U.K. economy,” CEP economists Swati Dhingra and Thomas Sampson said in a report published Wednesday.

Trading under World Trade Organization rules would lead to a reduction in trade with the EU of about 40 percent over the next decade, knocking about 3 percent off income per capita, according to the report. Other models accounting for more dynamic effects like productivity could double or triple those costs.

Formal Brexit talks are due to begin in the week starting June 19. May’s Conservative party has pledged to take the U.K. out of the single market in order to restrict migration, and to strike a wide-ranging free trade agreement with the bloc. There are many unknowns about the form of that agreement -- including the level of market access, whether there will be a transition period, and even whether a deal can be secured at all.

Further complicating the picture is the general election on June 8, where May’s lead in the polls over Jeremy Corbyn’s Labour Party has narrowed. He’s promised to prioritize membership of the single market and customs union, though that could prove difficult as he’s also pledged to end the free movement of people, which EU officials say the U.K. must retain if it wants to maintain market access.

The Labour Party has also said that no deal would be the “worst possible” option and that its government would negotiate a transitional accord.

The CEP economists said that the pound’s decline has hurt consumers by pushing up import costs and eroding living standards, while there’s no evidence the depreciation has lifted exports.

They also said the weaker sterling has lowered the U.K.’s terms of trade. While there’s a chance that exports could get a boost, even that is not likely to fully offset the negative currency cost.

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