Matthew Lynn

Is the OBR right about a no-deal Brexit recession?

Is the OBR right about a no-deal Brexit recession?
Text settings

Sajid Javid. Liz Truss. Dominic Raab, or perhaps even his old City Hall colleague Kit Malthouse. There are plenty of well-qualified candidates to move into the house next door when Boris Johnson becomes prime minister next week. But one thing is surely now certain. The incumbent will have to be removed. In the dying days of a dismal Chancellorship, Philip Hammond seems intent on doing nothing more than stoking the dying embers of Project Fear. At a moment when the country needs a Chancellor working out how to cope with a potentially major economic shock, it is stuck with one paralysed by an irrational fear of what might be around the corner.

Hammond proved that once again today when he latched onto the latest scenario from the Office for Budget Responsibility. He was out on the news again this morning warning of a ‘very significant hit’ to the British economy if we left the EU at the end of October without a deal.

It was hard to believe, however, that he had actually read the report itself. The OBR is tasked with making projections for what will happen to the UK economy. Quite correctly, it has looked at ‘no deal’ and come up with some predictions. What will happen? Plagues of locusts will descend on the country? The ports will be blockaded? Food will be running short on the supermarket shelves, and the sick will be left dying in hospitals as medicines ran out? Well, not exactly. Instead, we would be looking at a two per cent contraction of GDP in 2020, with a recovery in 2021, and roughly £30 billion added to the public debt as a result.

As one of the statistics nerds at the Treasury could point out to the Chancellor, this is the kind of thing that happens all the time. Britain has had eight recessions, defined as two consecutive quarters of negative growth, since World War Two. They range from the six per cent drop in output in 2008-09, the worst since the 1930s, to the relatively mild setbacks that punctuated the 1950s and 1960s. A two per cent contraction would only be half as bad as the 1980s recession, and neither would it be as deep as the early 1990s crash. In other words it would be relatively mild, and nothing to compare with the last three.

And of course, even that is debatable. The OBR report is a perfectly honest attempt to cope with an event that is very, very difficult to forecast. No major country has ever dropped out of the EU before, so we can’t really know for sure what might happen. The models are about as meaningful as Joanna and Jack’s relationship on Love Island. It might turn out that many of our exports to Europe are not very price sensitive, so tariffs have little impact. Or the other way round. We might find that a big boost to public spending, along with some tax cuts, and a blast of printed money from the Bank of England, successfully counters any hit to demand. Or not. It is, admittedly, hard to say. But one thing is for sure: it will be a perfectly manageable event.

In truth, what the UK needs right now is a chancellor who accepts that no deal is the most likely outcome, and starts preparing for it. How? An emergency Budget should boost public sector spending. Launching a dozen high visibility infrastructure projects, simplifying the tax system, and making our corporate taxes the most competitive in the world so that companies have plenty of incentive to be here even if we aren’t in the Single Market anymore, would all be sensible measures.

Given that wages and retail sales are still rising strongly, that might make it possible to sail through October with no recession at all. Hammond has just confirmed he is not the man for that task – and the most positive thing that could happen next week would be for him to be replaced.