What a No-Deal Brexit means for the UK

As the prospect of a no-deal Brexit appears to become an increasingly distinct possibility, Dr Nicholas Apergis, Professor of Economics at the University of Derby, outlines why an agreement is so important for the UK and its economy.

Leaving without an agreement

The UK is expected to leave the European Union (EU) on 31 October. This situation could of course change. The British government could decide to revoke Article 50 altogether or, if the UK makes another request, the European Council could agree to another extension of the Article 50 process.

Yet for the moment, a no deal outcome remains a real possibility, and one for which both the UK and the EU will need to prepare. If the UK leaves the EU without a Withdrawal Agreement, it will become a ‘third country’, losing its Member State status.

EU law will cease to apply to the UK from that moment onwards. In what follows, this brief blog will try to assess what no deal means, and what the impact might be.

No deal economics

Firstly, half of UK goods exports will face disruption. The share of the UK goods exports that go to the EU would face border checks where none currently exist, with new tariffs applying to a substantial proportion, especially agricultural exports and cars.

Advance planning and reductions in trade volumes may reduce immediate disruption at key ports, but some disruption to trade is inevitable.

Some preferential trading arrangements with a number of countries, including Canada, Turkey and Japan, would also no longer apply. And, the annual number of customs declarations for the UK is expected to rise from 55 million to 250 million.

It would take approximately two years for the UK to move from a system in which the government suffers some fiscal losses to a fully functional ‘steady state’ customs clearing system.

Striking a ‘no-deal deal’

Agreeing any deal with the EU after no deal would be much more difficult. Striking a deal outside the Article 50 framework would be far harder, take  longer and might lead the EU to ask for more concessions as national parliaments in member states get involved.

The impact on trade would be immediate, and new regulatory and customs arrangements would apply.

While borders are expected to remain open for travellers and tourists, there may be extra checks and resulting delays. How this affects individual sectors, however, will depend on the specific preparations undertaken.

Let’s use the crucial case of medical products.

Around three-quarters of medicines and over half the clinical consumables the UK uses come from (or via) the EU. The UK government has asked pharmaceutical firms to have an extra six weeks of supplies stockpiled in anticipation of disruption to cross-Channel trade to avoid immediate problems.

The government has agreed contracts for additional storage capacity (though it will be up to companies to pay for it) to ensure medicines can be stockpiled, and is procuring additional freight capacity on which medicines and medical products would be prioritised.

All these actions may help to avoid any immediate medical shortages. However, issues, such customs delays, might still lead to problems.

A currency crash?

The pound will almost certainly fall further. However, the impact of no deal may already have been ‘priced in’ to the value of the currency.

Under a floating exchange rate, a depreciated pound is a useful shock absorber, precisely because it directly reduces real wages. Moreover, given a relatively low fiscal deficit and long-term interest rates set at historically low levels, there is space to loosen fiscal policy in the short run.

This implies targeted tax cuts to support business and consumer demand. Additionally, while the Bank of England might face a difficult policy dilemma if inflation rose at the same time as the economy weakened, it is likely that it would prioritise supporting the economy by cutting interest rates and, if necessary, undertaking more quantitative easing over achieving the inflation target.

There would be some disruption to supply chains. This would have knock-on effects on production in sectors, such as the car industry and others that are dependent on just-in-time production processes.

If disruption were prolonged, it is likely there would be shortages of some foods. More specifically, November and December is the worst time of year for storage in the food and drink industry.

Uncertainty and a brake on growth

The UK economy could experience a further deterioration in its current recession, although its depth and severity would be uncertain. The overall economic impact would depend on a number of factors, such as the extent of the direct disruption to trade, the impact on consumer and business confidence, and the effectiveness of any government and Bank of England policy response.

World Trade Organisation’s (WTO) terms would mean the UK economy growing more slowly. If the future relationship with the EU was on WTO terms, the UK economy would continue to grow, but at a significantly slower pace than if the UK had remained in the EU. Per capita income could be 4% to 9% lower in ten years than it would otherwise have been.

Another serious impact will be seen in financial markets. Since financial markets are forward-looking and the presence of no deal will be known with some degree of certainty days or even weeks in advance, so these will largely manifest themselves before 31 October.

In this period, a further fall in the value of the pound is highly likely, and possibly a decrease in equity prices for firms whose operations are primarily in the UK.

It is important to distinguish between the financial system and markets. Tighter regulation since the financial crisis means that UK banks retain substantial capital buffers to deal with even extreme economic shocks, and given the extent of contingency planning by the Bank of England, the EU authorities and the financial sector, major financial market dislocations seem unlikely.

Only the end of the beginning

Overall, despite the uncertainty surrounding the Brexit terms, the UK will no longer be able to trade as it does now with the EU. The economic consequences will be negative, not only for the macro-economy, but also for specific sectors.

The impact of a no-deal Brexit will be significant and damaging. No deal will not be the end of Brexit, or even the beginning of the end.

When the dust clears, however, it may be (in the words of Winston Churchill) the end of the beginning.

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