When it comes to the possible Brexit scenarios, the options the UK faces are the good, the bad, and the ugly, according to an analysis by the Institute for Fiscal Studies (IFS).
A no-deal Brexit would “provide the worst economic scenario” for the UK economy, said the IFS, and neither extending the Brexit deadline, nor leaving the EU with an agreement would be ideal, although the latter would be the lesser of two evils. But the best economic outcome for the UK, according to the IFS, would be for the country to revoke Brexit altogether and remain in the union.
That’s not something UK Prime Minister Boris Johnson wants to hear, considering that he famously said he’d “rather be dead in a ditch” than so much as ask the EU for a Brexit extension.
But like it or not, the continuing process of leaving the European Union will be “arguably the most important determinant of the UK’s economic trajectory,” said the IFS.
The IFS released forecasts for the UK economy under four Brexit scenarios:
- An extension of the Brexit deadline, and continued uncertainty.
- A no-deal scenario accompanied by significant fiscal loosening.
- A negotiated Brexit deal passed through the current parliament.
- A second referendum resulting in a vote to remain in the EU.
“In each case, the impacts on the economy will depend not just on relationships with Brussels,” said the IFS, “but also on policy decisions made in Westminster.”
With two weeks left until the Brexit deadline, the UK and EU still have yet to come to an amicable divorce agreement which has left the British economy in a state of uncertainty. If the UK continues to delay Brexit by seeking an extension to the Oct. 31 deadline, the IFS assumes a further fiscal loosening of between 1 and 2% of GDP.t said there would be a chance, albeit small, that interest rates would be cut. Growth would remain below 1% in 2020 and, then pick up slightly though remain “very poor,” at below 1.5% in 2021 and 2022.
While continued uncertainty provides a gloomy economic forecast, leaving the EU without a deal would be “considerably worse, even under a relatively benign scenario,” said the IFS.
In this scenario, the IFS said it expects the UK government would implement further fiscal loosening totaling 2% of GDP. The Bank of England would cut interest rates to zero, and implement £50 billion ($63.2 billion) of quantitative easing. Additionally, private consumption and investment growth would fall, while net trade would also create a drag on growth. Overall, the IFS said the UK economy would be stagnant over the next two years and grow by just 1.1% in 2022, leaving it 2.5% smaller in that year than it would have been if Brexit were merely delayed.
“We find that a ‘no-deal’ Brexit makes for the hardest hit to the economy under these scenarios,” said the IFS.
Securing a Brexit deal would be better for the economy over the next two to three years than another delay, according to the IFS’ analysis. Assuming a delay would lead to tax cuts and further spending increases growth would pick up to “a still poor” 1.5% a year in the short term.
“Some pent-up investment should occur, and consumer confidence would improve, as the risk of a no-deal Brexit recedes,” said the IFS,
But “the most optimistic outlook for growth,” according to the IFS, would come from a scenario in which the 2016 referendum is overturned, Brexit is revoked, and the UK remains in the EU. If this were to happen, the IFS said it assumes the government would implement significant tax and spending increases, with a tightening of labor market regulation, and a rise in interest rates. In this case, the IFS forecast there would be GDP growth of 2% a year.