Budget Watchdog says No-Deal Brexit will Spur UK Recession

The U.K. will plunge into recession if it leaves the European Union without a divorce deal, with the pound plunging in value and the economy shrinking by 2% in a year, Britain’s official economic watchdog said Thursday.

The Office for Budget Responsibility made its assessment as chances of an economically disruptive no-deal Brexit appear to be rising. Both men vying to take over next week as Britain’s prime minister, Boris Johnson and Jeremy Hunt, say they will lead the U.K. out of the bloc, with or without an agreement on terms.

They claim that Britain can withstand any resulting turbulence, but most economists predict the economic shock would be severe.

The OBR, which provides the U.K. government with independent economic forecasts, said a no-deal Brexit would see “heightened uncertainty and declining confidence deter investment, while higher trade barriers with the EU weigh on exports.”

It predicted GDP would fall by 2% by the end of 2020 in a no-deal scenario, and borrowing would be around $37 billion a year higher from 2020-21 than it forecast in March.

Britain is due to leave the EU on Oct. 31, but Parliament has repeatedly rejected the divorce deal truck between Prime Minister Theresa May and the bloc. Johnson and Hunt, who are vying to replace May as Conservative party leader and prime minister, both say they will leave without an agreement if the EU won’t renegotiate.

The bloc insists it won’t change the 585-page withdrawal agreement, which sets out the terms of Britain’s departure and includes a transition period of almost two years to allow both sides to adjust to their new relationship.

“This document is the only way to leave the EU in an orderly manner,” EU Brexit negotiator Michel Barnier told the BBC in an interview broadcast Thursday.

Three years after British voters narrowly chose to leave the 28-nation EU, it remains stuck in limbo. May announced her resignation last month after failing to win Parliament’s approval for her Brexit deal.

Her successor is being chosen by members of the Conservative Party, most of whom are strongly in favor of Brexit and prepared to accept the risks of leaving without a deal. Johnson is the strong favorite to win the contest when the result is announced Tuesday.

He claims that Britain can flourish outside the EU if it has enough optimism and “mojo,” and says a no-deal Brexit will be “vanishingly inexpensive” if the country prepares properly.

Many others are less sanguine.

Treasury chief Philip Hammond, who has warned about the perils of a no-deal Brexit — and is likely to be fired by the next prime minister — said “I greatly fear the impact on our economy and our public finances” of a no-deal Brexit.

He said the OBR forecast was based on the “most benign version” of a no-deal Brexit, and in all likelihood “the hit would be much greater, the impact would be much harder.”

Meanwhile, the relationship between the British government and the EU has been frayed by years of testy negotiations and allegations of ill-will on both sides.

EU Commission Vice-President Frans Timmermans told a BBC documentary that the British lacked a plan and were “running around like idiots” during the Brexit negotiations. He cited a catchphrase from the classic British sitcom “Dads’ Army”: “Don’t panic!”

Junior U.K. Brexit minister Martin Callanan accused Timmermans of spreading “childish insults” about the British negotiating stance. Quoting another famous riposte from “Dad’s Army,” he said Timmermans was a “stupid boy.”

Budget Watchdog says No-Deal Brexit will Spur UK Recession

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