No-deal Brexit will hammer sectors so far spared hit from pandemic – OBR

A no-deal Brexit would hammer sectors that have so far proved resilient to the coronavirus pandemic and force another shake-up of Britain’s battered economy, the UK fiscal watchdog has warned.

The Office for Budget Responsibility (OBR) told MPs that failure to agree an EU withdrawal deal would impact firms that are helping the economy through the coronavirus crisis – such as manufacturers, financial services and agriculture.

It would lead to further job losses and an additional impact to UK activity at a time when the economy is already facing the biggest plunge in output for more than 300 years.

In a hearing with the Treasury Select Committee, the OBR said a no-deal Brexit would be at least as damaging as the long-term impact of Covid-19 on the economy.

It added that the economic impact would be “widespread”, meaning few sectors are spared being dealt a blow by the pandemic on one side and a no-deal Brexit on the other.

OBR chair Richard Hughes said: “Covid affects the non-tradeable sectors of the economy, whereas Brexit affects the tradeable goods sectors.”

He added: “Were we to leave the EU without a deal, these are the sectors that would be hit hardest by the fact they lose access to a very important market to them, which is the EU.”

The comments come after the OBR warned in its economic and fiscal outlook alongside last week’s spending review that a no-deal Brexit could wipe another 2% off the economy next year and lead to a long-term decline in gross domestic product (GDP), a measure of the size of the economy.

In the hearing, OBR member Sir Charlie Bean said: “The nature of the Brexit shock is one that requires further restructuring of the British economy.

“Some parts that are no longer so profitable will have to downsize, other areas will need to expand as a result of the changed terms of trade with the European Union.

“People will lose their jobs in their declining industries before the new jobs are created in the ones that will expand, so there will be a period where unemployment needs to rise temporarily alongside that necessary restructuring.

“That’s pretty much unavoidable with something like Brexit.”

The OBR has predicted that the economy will suffer a 4% drop in output over the long-term from Brexit, even if the UK and EU sign a free trade deal.

But it said if the UK is set to revert to World Trade Organisation terms with its largest trading partner, it would reduce GDP by a further 2% in 2021, on top of the havoc wreaked by coronavirus.

Employment would also suffer in the event of a no-deal outcome, it predicted.

The OBR forecasts that unemployment will peak at 8.3% in the third quarter of 2021 if there is no agreement – 0.9% higher than in its central forecast for the quarter.

All of this comes on top of a grim set of forecasts for the economy as a result of the pandemic.

The OBR’s forecasts show GDP plummeting by 11.3% in 2020 – the largest annual fall since 1709, the year of the Great Frost.

And £280 billion of government support to help the economy through the pandemic will see borrowing soar to a peacetime high of £394 billion – the equivalent of 19% of GDP in 2020-21.