No-deal Brexit economic fallout predicted to exceed that caused by coronavirus

Collapsing the Brexit trade talks and leaving without a deal is forecast to wreak havoc on the UK economy.

If the UK decides to operate using World Trade Organisation (WTO) rules with the European Union, its largest trading partner, from January 1 2021, then official figures forecast that 2% will be wiped off the economy next year as a result.

Prime Minister Boris Johnson has often talked of how Britain can prosper under an "Australia" style relationship with Brussels – Downing Street shorthand for no-deal.

But finance chiefs disagree, warning of long-term economic damage that would eclipse even that caused by coronavirus.

In stark comments last month, Bank of England governor Andrew Bailey told MPs on the Treasury Select Committee: "I think the long-term effect would be larger than the long-term effect of Covid.

"The models would suggest that the effects of a WTO no-deal trade agreement are longer term.

"The reason for that is that it takes a lot longer period of time for the real economy to adjust."

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Pictures of the week: December 6 - 12
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Pictures of the week: December 6 - 12
Decoration seen on the side of Harrods store. World Famous Knightsbridge Department store Harrods is all lit up and decorated for Christmas. (Photo by Keith Mayhew / SOPA Images/Sipa USA)
BRISTOL, ENGLAND - DECEMBER 09: Howard Coggins performs during the Living Spits Beauty and the Beast comedy at the Bristol Old Vic on December 9, 2020 in Bristol, England. Living Spit stars Howard Coggins and Stu McLoughlin will perform Beauty and the Beast in a series of live broadcasts and on stage shows at the Old Vic from December 18. (Photo by Matthew Horwood/Getty Images)
A man dressed as Santa Claus poses some 135 meters in the air on a pod of the London Eye, to kick-off the festive season, in London, Thursday Dec. 9, 2020. The London Eye tourist attraction, which has reopened to the public as coronavirus restrictions are relaxed, offers 360-degree views, with the River Thames, Waterloo Bridge at centre, and City of London background right. (David Parry/PA via AP)
Supporters of European Union demonstrate against Brexit near Britain's Parliament in London, Wednesday Dec. 9, 2020. Britain's Prime Minister Boris Johnson and the European Union's Commission president Ursula von der Leyen will meet later for a dinner that could pave the way to a Brexit trade deal, or tip the two sides toward a chaotic economic rupture at the end of December. (Yui Mok/PA via AP)
European Commission President Ursula von der Leyen, right, welcomes British Prime Minister Boris Johnson prior to a meeting at EU headquarters in Brussels, Wednesday, Dec. 9, 2020. Leaders of Britain and the EU meet Wednesday for a dinner that could pave the way to a post-Brexit trade deal, or tip the two sides toward a chaotic economic rupture at the end of the month. (Olivier Hoslet, Pool via AP)
Husband and wife Vic and Penny Griffiths talk to media after receiving the Pfizer/BioNTech covid-19 vaccine at Basildon University Hospital, in Basildon, Essex, as the largest ever immunisation programme in the UK's history continues.
Britain's Prince William and Kate, Duchess of Cambridge speak to local people during a visit to Cleeve Court Care Home in Bath, England, Tuesday Dec. 8, 2020, on the final day of a three-day tour across the country. (Paul Grover/Pool via AP)
A member of museum staff looks at dead leaf butterflies during a preview of Fantastic Beasts: The Wonder of Nature, at the Natural History Museum in London. The exhibition explores the natural world's connections with mythical animals such as dragons, unicorns and sea monsters and the beasts seen in the Wizarding World. (Photo by Kirsty O'Connor/PA Images via Getty Images)
Lorna Lucas, 81, reacts as she receives the first of two Pfizer/BioNTech COVID-19 vaccine jabs shortly before her husband, Winston (left), also has one administered, at Guy's Hospital in London, on the first day of the largest immunisation programme in the UK's history. Care home workers, NHS staff and people aged 80 and over began receiving the jab this morning.
A member of museum staff looks at a light installation during a preview of Fantastic Beasts: The Wonder of Nature, at the Natural History Museum in London. The exhibition explores the natural world's connections with mythical animals such as dragons, unicorns and sea monsters and the beasts seen in the Wizarding World. (Photo by Kirsty O'Connor/PA Images via Getty Images)
EMBARGOED TO 0001 WEDNESDAY DECEMBER 9 File photo dated 21/6/2020 of people watching the sunrise at Tynemouth. The UK should cut greenhouse gas emissions by nearly four-fifths by 2035, climate advisers have said, signalling major changes to home heating, cars and diets.
Visitors walk through the gardens at Longleat House, where lights and illuminated structures bathe the grounds in colourful and atmospheric light as part of the Land of Light winter attraction. (Photo by Ben Birchall/PA Images via Getty Images)
Residents wave to Britain's Prince William and Kate, Duchess of Cambridge as they visit Cleeve Court Care Home in Bath, England, Tuesday Dec. 8, 2020, on the final day of a three-day tour across the country. (Paul Grover/Pool via AP)
A woman walks past graffiti with the words Victory to the NHS (National Health Service) on a wall at the Royal Victoria Hospital, one of several hospitals around Britain that are handling the initial phase of a COVID-19 immunization program, in West Belfast, Northern Ireland, Tuesday, Dec. 8, 2020. British health authorities rolled out the first doses of a widely tested and independently reviewed COVID-19 vaccine Tuesday, starting a global immunization program that is expected to gain momentum as more serums win approval. (AP Photo/Peter Morrison)
A woman wears a face mask as she walks on Millennium Bridge, in London, Tuesday, Dec. 8, 2020. The United Kingdom is beginning a mass vaccination campaign to inoculate the population against COVID-19 virus, with the elderly, vulnerable and key workers among the first to receive the first part of the inoculation. (AP Photo/Alberto Pezzali)
Margaret Keenan, 90, is the first patient in the United Kingdom to receive the Pfizer/BioNtech covid-19 vaccine at University Hospital, Coventry, administered by nurse May Parsons, at the start of the largest ever immunisation programme in the UK's history.
The Malvern Winter Glow, a brand new festive illuminated trail across 90 acres of the Three Counties Showground in Malvern, Worcestershire. The installation opens today and runs until January 3. (Photo by Jacob King/PA Images via Getty Images)
Members of the media are gathered outside St Thomas' Hospital, one of several hospitals around Britain that are handling the initial phase of a COVID-19 immunization program, in London, Tuesday, Dec. 8, 2020. British health authorities have rolled out the first doses of a widely tested and independently reviewed COVID-19 vaccine, starting a global immunization program that is expected to gain momentum as more serums win approval. (AP Photo/Alberto Pezzali)
BRIGHTON, ENGLAND - DECEMBER 07: Danny Ings of Southampton sends Matthew Ryan of Brighton & Hove Albion the wrong way from the spot and scores a goal to make it 2-1 during the Premier League match between Brighton & Hove Albion and Southampton at American Express Community Stadium on December 07, 2020 in Brighton, England. A limited number of fans (2000) are welcomed back to stadiums to watch elite football across England. This was following easing of restrictions on spectators in tiers one and two areas only. (Photo by Robin Jones/Getty Images)
People pass Lumen by David Ogle, part of 'Winter Light' a new open-air exhibition at the Southbank Centre in London, Monday, Dec. 7, 2020. Featuring a range of international artists, Winter Light includes over 15 artworks and new commissions that make use of light, colour and animation. The artworks and new commissions will remain on display until the end of Feb. (AP Photo/Kirsty Wigglesworth)
A Covid-19 Vaccination Record Card at the Royal Victoria Hospital, in Belfast, on the first day of the largest immunisation programme in the UK's history. Care home workers, NHS staff and people aged 80 and over will begin receiving the jab from Tuesday.
The Duke and Duchess of Cambridge look on from the balcony at London Euston Station ahead of boarding the royal train as they leave London for a tour across the UK.
A protester holding a placard expressing her opinion in the crowd at Piccadilly Gardens during the freedom march. Protesters take to the streets again to rise awareness regarding the recent lockdowns and how it is affecting peoples livelihoods. (Photo by Andy Barton / SOPA Images/Sipa USA)
EDITORIAL USE ONLY Brian Cooke, from Essex is one of the first customers to charge his electric car at the newly opened GRIDSERVE, the UK's first Electric Forecourt, Essex.
An empty Christmas market on a quiet evening in Nottingham city centre. (Photo by Zac Goodwin/PA Images via Getty Images)
HMS Lancaster sailing back to Portsmouth Naval Base after shadowing and gathering intelligence on Russian warships travelling around the UK.
Skaters on the new Coventry Glides Ice skating rink. Coventry Glides will go ahead under Tier 3 Covid-19 restrictions, in line with national regulations. It means that, up until the possible revision of the Tier system on 16 December, the event will now only admit audiences from Coventry, Warwickshire, and Solihull. People from outside of these areas who have already booked tickets for dates before 16 December will be contacted for a full refund. (Photo by Keith Mayhew / SOPA Images/Sipa USA)
A Liverpool fan on the stands waits for the start of the English Premier League soccer match between Liverpool and Wolverhampton Wanderers at Anfield Stadium, Liverpool, England, Sunday, Dec. 6, 2020. (Clive Brunskill/Pool via AP)
An aerial view of the thirteenth century St. Mary's Church as the British government develops a vast area into a post-Brexit lorry park, in Sevington, southern England, Sunday Nov. 6, 2020. While diplomatic efforts to strike a Brexit trade deal continue between Britain and the European bloc, preparations are underway to cope with anticipated goods vehicle cross border transport delays. (Gareth Fuller/PA via AP)
Men wearing face masks as a precaution against the spread of covid 19 walking along Regent Street in London. (Photo by Pietro Recchia / SOPA Images/Sipa USA)
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The Office for Budget Responsibility (OBR) has forecast that a no-deal scenario would lower gross domestic product (GDP) – the main marker of the health of the economy – by 2% in 2021, a drop that would come on top of the fiscal impact wrought by Covid-19.

Investec's chief economist, Philip Shaw, told the PA news agency that if the prediction proved correct, it would be equivalent to the economy sinking by £45 billion next year.

According to Chancellor Rishi Sunak, coronavirus is expected to leave "long-term scarring", meaning in 2025, the economy will be around 3% smaller than expected in the March Budget, even before the effects of no-deal are felt.

In analysis published to coincide with November's Spending Review, the OBR said the economic shock of the "various temporary disruptions to cross-border trade and the knock-on impacts" caused if there was a no-deal outcome would continue for years to come.

The UK fiscal watchdog said: "As these abate, the longer-term effects of lower trade intensity continue to build such that output is 1.5% lower than our central forecast after five years, and 2% lower in the long run."

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

The OBR forecasted 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.

And it is those sectors that have proved resilient during the pandemic that would face the hardest hammering, it added.

Andrew Bailey
Governor of the Bank of England Andrew Bailey (Tolga Akmen/PA)

In an evidence session before MPs earlier this month, OBR chairman Richard Hughes said a failure to agree an EU trade deal would hit 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, he warned.

The OBR is predicting the economy will plummet by 11.3% in 2020 – the largest annual fall since 1709, the year of the Great Frost, and the worst performance of any of the group of seven advanced economies, according to the Organisation for Economic Cooperation and Development.

In a hearing with the Treasury Select Committee, Mr 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."

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