UK: Economic hit from no-deal not to be as big as most fear – CE

FXStreet reports that although a no-deal is clearly the biggest near-term downside risk to the UK economy, economists at Capital Economics doubt the economic consequences will be as big as most fear. 

“A ‘no-deal’ would most probably involve all those agreements in the Withdrawal Agreement (the financial settlement, citizens’ rights, Northern Ireland), the substantial progress made on financial services equivalence and the rollover of the bulk of the UK’s third-party EU trade deals. A no-deal at this stage would be a less disruptive ‘cooperative’ no deal than a more disruptive ‘uncooperative’ no-deal. As a result, the economic consequences would probably be smaller than most people fear.”

“The Bank of England would probably respond by loosening monetary policy further (perhaps by increasing the pace of its gilt purchase, increasing its purchases of corporate bonds and/or widening its lending schemes to banks and businesses) and the Chancellor may also loosen fiscal policy (perhaps by cutting VAT and/or providing financial support to those businesses whose exports to the EU would be subject to tariffs).”

“We suspect that in a ‘cooperative’ no-deal GDP growth would be around 1% lower in 2021 as a whole than it would be if there were a deal. Put into context, the COVID-19 crisis has meant that GDP this year will be about 11.5% lower than last year and at one point earlier this year it was 25% lower.”