Disorderly Brexit Could Have ‘Severe’ Impact, U.K. Watchdog Says

(Bloomberg) -- The U.K. could experience shortages of vital imports, a sharp fall in the pound and higher prices in the shops in the event of a disorderly Brexit, according to the Office for Budget Responsibility.

The fiscal watchdog issued the warning Thursday in a paper outlining the task it faces to assess the economic and fiscal consequences of Britain leaving the European Union.

Its current projections are based on the assumption that the two sides reach an agreement but a no-deal Brexit could hit the British economy hard, leading to higher budget deficits and government debt, the OBR said.

“A disorderly exit is not impossible and it could have a severe short-term impact on demand and supply in the economy and on the public finances,” the OBR said. “U.K. asset prices could fall sharply which, together with heightened uncertainty, would cause households and businesses to rein in their spending.

“A fall in the pound would also raise domestic prices, squeezing households’ real incomes and spending,” it added. “And there could be temporary constraints on supply if, for instance, a lack of customs preparedness led to significant delays at the border.”

Three-Day Week

While calibrating the potential impact of crashing out of the EU is “next to impossible,” it is “worth noting” the disruption caused in 1974 when energy shortages and militant miners led to the introduction of a three-day week, cutting output by almost 3 percent in a single quarter, the OBR said.

The OBR said that studies based on the performance of countries that had similar growth rates and characteristics prior the 2016 referendum suggest Britain has lost as much as 2.5 percent of output as a result of the decision to leave the EU. It also warned that the economic benefits of new trade deals with non-EU countries after Brexit may be negligible.

With Brexit day less than five months away, hopes are growing that Britain and the EU will clinch an agreement in the coming weeks. An accord is needed to unlock a planned 21-month transition period and avoid the immediate imposition of tariffs.

However, the OBR warned it is far from clear that any divorce deal and accompanying declaration about future trade ties will be sufficiently detailed to update its current assumptions, and “it would certainly be too late to do so in our forthcoming budget forecast” on Oct. 29.

©2018 Bloomberg L.P.