Deadlock on Brexit may have caused recession

Economic forecaster says new prime minister can avert no-deal damage with counter-measures

BRITAIN could already be in a recession caused by Brexit paralysis, a top economic forecaster has warned, as it outlined how the new prime minister can minimise the damage from a nodeal departure.

The National Institute of Economic and Social Research (Niesr) believes there is a one in four chance the economy is already in a technical recession, defined as two consecutive quarters of contraction.

In a gloomy set of forecasts, the independent think tank warned there was a “significant risk that a severe economic downturn will begin within the next six months”.

However, Nieser predicted that the new PM and the Bank of England can still stop the economy shrinking in 2020 with an “orderly no deal”.

Even if a no-deal Brexit is avoided, growth will slow to 1.2pc this year and to 1.1pc in 2020 as “uncertainty continues to hold back investment and productivity growth remains weak”.

The economy “has stalled” and the outlook beyond October is “very murky”, it said.

After a growth spurt at the start of the year, the economy has suffered a sharp slowdown in the second quarter. Niesr believes the economy shrank by 0.1pc in the second quarter.

Growth has stuttered as stockpiling built up ahead of the original Brexit date of March 31 started to unwind and car manufacturers brought forward or extended planned outages.

Analysts have warned that the economy would suffer a sharp contraction in a no-deal scenario – but Niesr believes that policymakers can mitigate the economic fallout.

GDP is expected to be flat in 2020 under its scenario that would see the UK leave the European Union without a deal or transition period, and revert to WTO terms.

The Bank of England would need to cut interest rates to 0.25pc in November to shore up the economy and the impact would also be minimised by the Government implementing contingency measures and “fiscal stabilisers”.

Under this scenario, unemployment would only be slightly higher than its base forecast at 4.3pc in 2020, compared to 4.1pc.

Government borrowing would also edge up in a no-deal Brexit after both Conservative leadership contenders outlined plans to ramp up spending. The deficit as a percentage of GDP would rise to 2.7pc in an “orderly no deal” next year, compared to 2.6pc if a cliff-edge Brexit is avoided.

However, inflation would surge to more than 4pc in 2020 as import costs rise from a tumble in the pound, forcing the Bank to then hike interest rates.

“Monetary policy would be more effective but faces the trade-off between fighting higher inflation, as a result of higher import prices and a sharp exchange rate depreciation, and stabilising the level of output,” Niesr said.

While policymakers could mitigate the short-term damage from a no-deal Brexit, Niesr predicted that GDP would be 5pc to 6pc lower than its baseline forecast in the long run.

Meanwhile, the UK Trade Policy Observatory also warned that average real incomes could slump by 4pc in a nodeal scenario.

The textiles and car industries would suffer the biggest falls in real wages, dropping by 12pc and 9pc respectively. Unskilled workers would see “slightly larger falls”, it said.

4pc The amount inflation would rise to next year as import costs rise from a tumble in sterling in the event of no deal, says Niesr