Disorderly Brexit could unleash savage recession, Bank of England

A report from the Bank of England warns that the outflow of people may hurt the British economy. Photo/Getty Images.

The UK could suffer the worst economic slump since at least World War II if Prime Minister Theresa May fails to get her Brexit plan past lawmakers and the country crashes out of the European Union without a deal.

The stark warning from the Bank of England (BOE) sees the economy shrinking by 8 per cent within a year and property prices plunging almost a third under a worst-case scenario. For context, the peak to trough drop in UK GDP in the financial crisis was just over 6 per cent.

Meanwhile, questions about the credibility of the UK would send sterling into a tailspin, forcing the central bank forced to hike interest rates sharply to combat inflation.

Here are the main points in the "disorderly" Brexit scenario:

- GDP drops 8 per cent;
- House prices fall 30 per cent;
- Commercial property prices plunge 48 per cent;
- Sterling falls 25 per cent to below parity with the dollar;
- Unemployment rises to 7.5 per cent;
- Inflation accelerates to 6.5 per cent;
- BOE benchmark rate rises to 5.5 per cent and averages 4 per cent over 3 years; and
- Britain goes from net migration to net outflows of people.

The BOE analysis, carried out in response to a request from a committee of lawmakers, is the latest to highlight the dangers from having no new trade arrangements in place by the time Britain leaves the EU on March 29.

The pound was little changed after the report. Critics of the BOE said the central bank was too gloomy before the 2016 referendum on Brexit, when it warned there was a risk of recession in the months following a vote for Leave. The economy kept growing.

May is pushing her EU Withdrawal Agreement, but it's not clear she will have the numbers to get it through Parliament in a crunch vote on December 11.

If it's rejected, the UK will be on course to crash out into a legal limbo, with no special rules in place to regulate trade with the bloc. Earlier, the Treasury provided its own longer-term analysis, which also includes a hit to growth and incomes under any Brexit option.

The BOE said a disorderly Brexit would involve Britain losing the trade agreements it enjoys through EU membership, and border and customs infrastructure would be unable to cope.

But it's not clear the gloomy report will change much. While anti-Brexit groups will see it as reinforcing their argument, those in favour of leaving are likely to accuse Governor Mark Carney of reviving what they call "Project Fear."

The BOE made clear that a chaotic departure is not its assumption. It provided other options from what it calls a disruptive Brexit to the economic partnership with the EU sought by May.

While a disorderly situation would leave GDP as much as 10.5 per cent lower by the end of 2023 relative to remaining in the EU, the loss diminishes to less than 4 per cent under an agreement that maintains close ties.

The immediate hit to the economy from a disruptive Brexit, under which WTO tariffs and other barriers are introduced suddenly, would be about 3 per cent, the BOE said. The decline in house prices would be 14 per cent.