Graeme Wearden 

Britain at risk of ‘full-blown’ recession as no-deal Brexit looms – as it happened

Rolling coverage of the latest economic and financial news, including the Office for Budget Responsibility’s new stress test of the UK economy
  
  

Click to watch a reply of the OBR’s fiscal risks report press conference

Finally, here’s our updated news story on the Office for Budget Responsibility’s fiscal risks report, and its concerns about Brexit.

A no-deal Brexit would plunge Britain into a recession that would shrink the economy by 2%, push unemployment above 5% and send house prices tumbling by around 10%, according to the government’s independent forecasting body.

In an assessment of the impact of Britain leaving the EU without a deal at the end of October, the Office for Budget Responsibility said the result would be a year-long downturn that would increase borrowing by £30bn a year.

The assessment prompted a fresh warning from the chancellor, Philip Hammond, to Brexiters calling for a “harder” exit from the EU.

“The report that the OBR have published this morning shows that even in the most benign version of a no-deal exit there would be a very significant hit to the UK economy, a very significant reduction in tax revenues and a big increase in our national debt – a recession caused by a no-deal Brexit,” Hammond said in a Reuters interview.

“But that most benign version is not the version that is being talked about by prominent Brexiteers. They are talking about a much harder version which would cause much more disruption to our economy and the OBR is clear that in that less benign version of no deal the hit would be much greater, the impact would be much harder, the recession would be bigger. So I greatly fear the impact on our economy and our public finances of the kind of no-deal Brexit that is realistically being discussed now.”

The OBR estimated that the recession – caused by the impact of increased uncertainty and falling confidence on investment and trade – would be as bad as that suffered in the 1990s but only a third as bad as the slump at the time of the financial crisis of the late 2000s.

In its fiscal risks report, the OBR said its assessment was “relatively benign” because it was based on the less gloomy of two scenarios produced by the International Monetary Fund earlier this year. A worst-case scenario sketched out by the Bank of England last November estimated that the economy could shrink by as much as 8% in an even deeper recession than that of 2008-09.

Full story here

Over in New York, shares in Netflix have plunged by 10% in early trading.

Netflix disappointed Wall Street last night by reporting a drop in US-based subscribers, for the first time in eight years. It also missed its target for international subscriber growth, putting some blame on recent price increases.

Netflix has been spending $15bn per year on new content, driving up its debt pile, so a slowdown in growth is obviously worrying.

There’s not much market reaction to that vote, even though it underlines that MPs won’t accept a no-deal Brexit.

The pound is still up almost half a cent today at $1.247, and up half a eurocent at €1.112.

Newsflash: MPs have backed an amendment that would try to stop Boris Johnson shutting down parliament in the autumn to facilitate a no-deal Brexit by 315 votes to 274.

That’s a majority of 41, rather larger than expected.

Several cabinet ministers are thought to have abstained, including chancellor Philip Hammond (who was spotted on Downing Street while the voting took place).

Andy Sparrow’s Politics Live blog has all the action:

Updated

Consumers appear to be shaking off Brexit uncertainty, by driving retail sales up last month.

Retail spending jumped by 1% in June, partly due to Brits having a good old rummage through the local antique shop or charity chain.

My colleague Julia Kollewe explains:

Retail sales in the UK were unexpectedly strong in June, boosted by sales of secondhand goods at charity shops and antique dealers, although department stores continued to struggle.

The quantity of goods bought in June rose 1% from May, according to the Office for National Statistics. City economists had forecast a 0.3% drop in sales, following May’s 0.6% fall. The figures boosted the pound by half a cent to $1.2480.

However, there was a sharp slowdown in retail sales growth in the three months to June. Sales rose 0.7%, down from 1.6% in the previous three months – marking the weakest growth rate since the three months to February.

More here:

OBR Brexit stress tests: the key points

The Office for Budget Responsibility’s Brexit analysis certainly paint a worrying picture of life in Britain after a no-deal exit from the EU.

Even though it uses the least severe of the IMF’s two no-deal Brexit forecasts, the OBR assumes:

  • Net migration into the UK is lower by 25,000 a year out to 2030.
  • The UK enters a year-long recession in the fourth quarter of 2019.
  • The pound immediately plunges by 10%, towards $1.1 against the US dollar
  • Unemployment rises, peaking at just over 5 per cent in 2021 (compared with 3.8% today)
  • Inflation rises, and wage growth slows, meaning real wages are “significantly lower” – by 2.5 per cent by the start of 2024.
  • House prices fall by almost 10% between the start of 2019 and mid-2021.
  • The Bank of England cuts interest rates to around 0.2% by the end of 2020.
  • Business investment falls a cumulative 15 per cent below the OBR’s March forecast by the end of 2021

This all adds up to higher borrowing, up around £30bn a year higher on average from 2020-21 onwards.

That’s because:

  • Income tax and national insurance receipts fall, pushing up borrowing by around £16.5bn a year
  • Capital tax receipts fall sharply thanks to the falls in asset prices, especially in the housing market, adding around £10 billion a year from 2020-21 onwards
  • VAT falls by £3bn a year, due to lower consumer spending
  • Lower profits take around £3bn off onshore corporation tax receipts

Labour MP Chris Leslie is also concerned:

Updated

John McDonnell, Labour’s shadow chancellor has seized on the OBR’s warnings, urging fellow MPs to vote against a no-deal Brexit today.

He says:

“It’s obvious the Conservative Party constitutes a clear and present danger to the economy and the wellbeing of everyone in the UK.

“We know that a No Deal Brexit would devastate the UK economy and the public finances, and it comes on top of the failed economic approach for the last nine years.

“This warning makes it even more imperative MPs from across Parliament back today’s amendments to try and block the next Prime Minister from shutting down Parliament to force through a no-deal Brexit.

“The OBR says that the current Chancellor has ‘all but given up’ on his borrowing targets, with the Treasury having lost its grip on spending just as the Chancellor has lost control over the Brexit argument in the Conservative Party.

MPs will vote on an amendment passed by the House of Lords, which would prevent parliament being shut down, or ‘prorogued’, ahead of the 31st October Brexit deadline.

The OBR’s report has been published as many firms grapple with the threat of no-deal Brexit chaos.

Clare Francis, head of Brexit advisory at law firm Pinsent Masons, says firms face ‘shock waves’ from a disorderly Brexit.

“The OBR report brings the negative impact of a no-deal Brexit into sharp focus. For many this will send shockwaves through their business as they attempt to prepare for the very real possibility of a no-deal Brexit at the end of October.

She warns that crashing out of the EU in late October is actually worse than exiting back in March:

“For Industries that are exposed to a seasonal flow of goods, such as food and retail, a winter time EU exit creates a more extreme economic risk compared to the original spring time date. This means that those businesses exposed to seasonal fluctuations must step up plans to hedge against a no-deal Brexit. Streamlining supply chains, switching to UK suppliers and realigning the workforce could all bolster the foundations of businesses grappling with Brexit risk.”

Updated

Here’s a clip of Philip Hammond warning against a no-deal Brexit:

Hammond: Boris's no-deal Brexit would be even worse

Philip Hammond, UK chancellor (for a few more days, anyway) has weighed in -- saying that a no-deal Brexit could be even more severe than the OBR has suggested.

He told Sky News:

The report that the OBR have published this morning shows that even in the most benign version of a no-deal exit there would be a very significant hit to the UK economy, a very significant reduction in tax revenues and a big increase in our national debt - a recession caused by a no-deal Brexit.

But that most benign version is not the version that is being talked about by prominent Brexiters. They are talking about a much harder version, which would cause much more disruption to our economy. And the OBR is clear that in that less benign version of no-deal the hit would be much greater, the impact would be much harder, the recession would be bigger.

So I greatly fear the impact on our economy and our public finances of the kind of no deal Brexit that is realistically being discussed now.

Andrew Sparrow’s Politics Live blog has all the details.

The OBR has also cautioned Boris Johnson and Jeremy Hunt against making extravagant pledges -- warning that there’s no money for a ‘free lunch’.

Today’s fiscal risks report says:

It must be understood that additional tax cuts or spending increases would push government borrowing and debt up from the levels expected in our forecasts and that there is no war-chest or pot of money set aside that would make them a free lunch.

The Government does have room for manoeuvre against its ‘fiscal mandate’ for structural borrowing next year, but that does not provide an anchor for medium term tax and spending decisions.

Both Johnson and Hunt have made expensive pledges during their battle to become Conservative Party leader, often based on the Brexit ‘war chest’ set aside by chancellor Philip Hammond.

That, though, is simply extra borrowing not a wodge of cash - and it won’t be free if Britain crashes out of the EU.

The OBR are now taking questions from journalists at the fiscal risks press conference.

Unfortunately they’ve turned the live feed off. Fortunately the BBC’s Faisal Islam is tweeting.

Sky’s Ed Conway also points out that the OBR could have taken a more pessimistic view (but didn’t):

In conclusion, Robert Chote says that many of the shocks, pressures and risks “taken on by choice” by the EU referendum are largely the same as two years ago.

However, he warns that recent developments make no-deal a larger threat, warning:

Brexit risks feel more prominent than two years ago, with no deal being countenanced at the highest levels, amid considerable uncertainty about what that would mean in practice.

OBR chairman Chote also points out that the government appears to be losing its enthusiasm for balanced budgets.

He says the risks from austerity fatigue have “partly crystallised”, through higher health spending, while others are forming through the “shopping lists” of tax cuts and spending rises drawn up by Boris Johnson and Jeremy Hunt

Finally, there is an “open discussion” about how the goal of achieving a balanced budget by the mid-2020s might be replaced by something loose, he concludes.

That’s the end of his statement.

Chote: Why no-deal would hurt UK finances

Robert Chote adds that a no-deal Brexit would drive up inflation, due to new tariffs and the plunging pound

But the OBR predicts that the Bank of England could choose to cut interest rates, tolerating higher prices in the shops, to prop up the economy and bring output back to its potential.

The economic shock of no-deal would push up government borrowing would rise by around £30bn a year, Chote add.

  • Income tax and national insurance would fall (because jobs would be lost)
  • Capital tax receipts fall sharply due to falling house prices and fewer transactions
  • Debt spending would fall, though, due to lower interest rates

This chart shows the details (anything above the x-axis is an extra cost, below the line are savings).

Chote adds that the OBR assumes that the UK’s current payments into the EU budget are simply “recycled into domestic spending, including the divorce bill”.

OBR: No-deal Brexit would create recession and send pound tumbling

Onto Brexit!

Robert Chote says the OBR’s economics have crunched the fiscal impact of a no-deal Brexit, and concluded that it would push the UK economy into recession.

In a timely warning to Boris Johnson and Jeremy Hunt, he says:

The big picture is that heightened uncertainty and declining confidence deter investment, higher trade barriers with the EU weigh on domestic and foreign demand, while the pound and other asset prices fall sharply.

These factors combine to push the economy into recession.

These charts (based on the IMF’s latest work) show the scale of the damage:

OBR: Climate change could drive mass migration and conflict

The OBR has also looked at the risk that climate change poses to the UK’s finances.

OBR chief Robert Chote tells the press conference that the scale of the risks depends hugely on the extent to which global temperatures rise (fair enough!).

If the targets outlined in the Paris Agreement are met, then climate change could be less costly than other threats, Chote suggests.

However...

But if global mitigation fails, and temperature rises are more significant, the risks could be greater and harder to assess.

This would make mass international migration and induced period of conflict more likely.

OBR chief Robert Chote is now outlining a list of spending risks that could threaten the UK.

Medium term risks include: austerity fatigue, health spending and welfare reforms.

Long-term risks include social care costs, Britain’s ageing population, and the pensions ‘triple-lock’ (under which pensions rise by inflation, wage growth, or at least 2%).

On social care, Chote says it would be “nice” to present some new analysis, but as the government’s response to the Dilnot Review has been languishing in Whitehall for years, the OBR can’t crunch the numbers.

He also tacitly criticises the decision to remove free TV licences from over-75s, saying it is “unusual” to delegate decisions about welfare benefits to a broadcasting company [the BBC].

Updated

Larry Elliott: No-deal Brexit plunges UK into recession

Our economics editor Larry Elliott has swiftly analysed the OBR’s Brexit forecasts, and reports:

A no-deal Brexit would plunge Britain into a recession that would shrink the economy by two per cent by the end of next year, according to the Government’s independent forecasting body.

The Office for Budget Responsibility said increased uncertainty and falling confidence would deter investment and hit trade.

In its latest Fiscal Risks Report the OBR said: “Together, these push the economy into recession, with asset prices and the pound falling sharply.“

Real GDP falls by 2% by the end of 2020 and is 4% below our March forecast by that point.”

Up until now the OBR has been assuming a smooth Brexit when coming up with its forecasts but it said the willingness of both Boris Johnson and Jeremy Hunt to contemplate a no deal departure meant it was stress testing alternative scenarios.

The OBR said leaving without a deal would add £30bn a year to borrowing from 2020-1 onwards and lift the net debt by 12% of GDP by 2023-4.

“A more disruptive or disorderly scenario could hit the public finances much harder” the OBR said.

The OBR used the IMF model of the economy to make its forecasts.

OBR chief Robert Chote says that the UK economy may have shrunk in the last quarter, partly because of Brexit stockpiling earlier in 2019.

This dragged activity forwards into January-March, as firms tried to hoard raw materials, parts, and finished goods in case of disruption at the ports.

OBR: UK at risk of 'full-blown' recession

The OBR’s fiscal risks report is out, and as predicted it warns that Britain would be dragged into recession after a no-deal Brexit.

Worryingly, Britain’s fiscal watchdog says that weak business surveys from June suggest that Britain may already be entering a “full-blown recession”.

It warns:

Surveys were particularly weak in June, suggesting that the pace of growth is likely to remain weak. This raises the risk that the economy may be entering a full-blown recession.

The fiscal risks posed by recessions depend on their depth and persistence, the sectors most deeply affected, and the pace at which the economy subsequently recovers

If Britain leaves the EU without a deal, the OBR explains that UK tax revenues would shrink, pushing up government borrowing.

The OBR estimates that UK government borrowing would be around £30bn a year higher than planner in 2020-21, based on the International Monetary Fund’s analysis from April (explained at 8.23am).

However, the OBR also warns that the IMF’s forecasts are ‘more benign’ than other views, and ‘by no means a worst-case scenario’. That suggests that a no-deal Brexit could be even worse than thought....

The report is online here.

More to follow....

Watch the OBR's press conference here

The Office for Budget Responsibility will release its Fiscal risks report 2019 in a few minutes, followed by a press conference which will be streamed here:

Some relief for UK holidaymakers heading abroad this summer - the pound is rising this morning.

Sterling has gained a third of a cent to $1.2467 against the US dollar, having hit a 27-month low below $1.24 on Wednesday.

It’s also slightly higher against the euro at €1.109, having hit a six-month low this week amid no-deal Brexit fears.

On Wednesday, investment bank Morgan Stanley warned that the pound could plunge towards parity with the dollar - for the first time since the 1980s.

“The pound has come under intense selling pressure since Prime Minister May withdrew from her party leadership position, leaving markets with increased concern that the UK may be heading towards a harder Brexit.

Should this scenario materialise, pound-dollar could fall into the $1.00-$1.10 range.”

Updated

Conservative MP Rishi Sunak, a Boris Johnson supporter, thinks we should be sceptical about the OBR’s Brexit warnings:

True, employment is at a record high - although recent gains have been driven by more people taking self-employed, part-time roles.

Plus, business investment has actually been weak since the 2016 referendum, as this chart from the Bank of England shows.

Here’s some reaction to the OBR’s no-deal Brexit warning (even though it’s not been published yet).

Neil Foster of the GMB Union hopes it will concentrate minds in Westminster:

Asset manager Trevor Greetham points out that leaving with a deal is expected to also slow the UK economy (although not by as much as a no-deal shock).

Today’s OBR fiscal risks report will also analyse possible risks to the public finances from climate change.

This may tackle the “tragedy of the horizon” - basically, once climate change becomes a defining issue for financial stability, it may already be too late [Bank of England governor Mark Carney gave a good speech on this recently]

Hunt: No-deal Brexit has consequences

Foreign secretary Jeremy Hunt is discussing Brexit on Radio 4’s Today Programme now, and admitted that No-Dealt could be a ‘short-term’ economic shock

Q: Will a no-deal Brexit be disastrous?

Hunt argues that the 2016 referendum must be implemented, despite economic costs, saying:

I don’t think anyone should minimise the fact there will be economic consequences to no deal. but we should also recognise that we are a democracy.

We must do what we are committed to do in the referendum,

Q: Democracy doesn’t pay for new schools and hospitals, money does. The chancellor says there is a £90bn cost from a no-deal Brexit over five years. [Brexiter Conservative MP] Jacob Rees-Mogg says we’d be richer. Who’s right?

Hunt argues that Britain could ride out the ‘shock’ of leaving the EU without a withdrawal agreement.

Even with the shock of a no-deal Brexit, over time we could make it work and we could flourish and prosper and we could indeed become richer as a country.

[But] I wouldn’t minimise the fact there could be a short-term shock.

Hunt also warned “European friends” that they would be blamed if Britain couldn’t get an acceptable deal, and crashed out of the EU:

We would have European neighbours that had deliberately chosen to make the UK poorer, and that would change and harden British attitudes to Europe for a generation.

That’s not something that wiser heads in Europe actually want.

The OBR’s no-deal Brexit analysis will be based on work released by the International Monetary Fund in April.

The IMF outlined a scenario under which there was no border disruption after a no-deal Brexit, but some new trade barriers were created by customs and regulatory border controls.

Under this Scenario A, import costs rise (although the government sets tariffs at zero to limit the impact), immigration is restricted, and financial conditions tightened (making credit more expensive, say).

The IMF calculated that this means UK GDP would be around 3.5% smaller in 2021 than if the country left with a deal.

The Fund also modelled a second scenario (B) in which there are “significant border disruptions that increase import costs for UK firms and households”. That creates a much deeper recession, as this charts hows:

This chart also shows that even after leaving with a deal (the yellow line), the UK economy is smaller than if the EU referendum had never happened.

Introduction: No-deal Brexit 'would cause recession'

Good morning, and welcome to our rolling coverage of the world economy, the financial crisis, the eurozone and business.

A new healthcheck on Britain’s economy is expected to warn today that a no-deal Brexit would plunge the country into recession.

The Office for Budget Responsibility (the fiscal watchdog) will outline how the UK economy would suffer if Britain fell out of the EU without a deal.

Under the OBR’s no-deal scenario, the UK economy would contract in 2020, and end up 3% smaller in five years time than if it left with a deal.

The warning will come in the OBR’s new Fiscal Risks Report for 2019, released today. This is a serious, weighty report, looking at the strength and weaknesses of the UK public finances, and the threats which could undermine them in the future.

It will include a fiscal ‘stress test’, measuring if the UK is really prepared to handle a wide range of topics including: macroeconomic and financial sector risks, specific revenue and spending risks, and balance sheet risks.

The report is due at 9.30am, but The Times has already had a sniff of it. It reports:

Britain will slip into recession next year and the economy will be 3 per cent smaller if there is a no-deal Brexit, the UK’s official economic forecaster is expected to say today.

The Office for Budget Responsibility is due to give its first assessment of the economic impact of a no-deal Brexit, including how it may affect household incomes, wages, employment and house prices.

The five-year forecast predicts that the economy will contract in 2020 as the UK officially enters into a recession, The Times understands. The economy is forecast to recover the following year, but GDP is still likely to be at least 3 per cent lower under a no-deal than if the UK leaves the EU with a deal.

The warning is well timed, with the two contenders to replace Theresa May both insisting that they would take the UK out without a deal if they become prime minister.

Boris Johnson even waved an Isle of Man kipper at Tory members last night, in an odd attack on the burden which the European Union places on producers [But....the Isle of Man isn’t in the EU, but is following its food rules so it can trade, just like the UK would have to....]

With the pound already wallowing at a 27-month low this week, Brexit concerns are mounting.

We’ll have full coverage of the OBR’s report from 9.30am.

Also coming up today

UK consumers have kept the economy motoring along since the Brexit vote. New retail sales figures will show whether people are cutting back, or still spending thanks to rising wages.

Economists predict a small drop in spending compared to May. A larger decline might intensify concerns about a recession.

The agenda

  • 9.30am BST: OBR publishes UK Fiscal Risks Report 2019
  • 9.30am BST: UK retail sales for June (expected to drop by 0.3%, including fuel).
  • 1.30pm BST: US weekly jobless figures

Updated

 

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