As the UK plunges into political chaos, it has slashed its official forecasts for economic growth. This year, GDP will grow by 1.2%, down from an October forecast of 1.6%, according to the Office for Budget Responsibility (OBR).
Chancellor Philip Hammond announced the downgrade to lawmakers in Parliament today, as he acknowledged that MPs probably had bigger things on their mind than his biannual fiscal update. Last night, MPs rejected prime minister Theresa May’s Brexit deal—for a second time—by a big margin. Tonight, lawmakers will vote on whether instead to exit the EU without a deal at all, a scenario widely seen to be catastrophic for the UK economy. If MPs reject a “no-deal Brexit,” then tomorrow they will vote on extending the deadline for leaving the bloc, currently set for March 29. But for how long?
Great question. Hammond told Parliament that after last night’s vote there is a “cloud of uncertainty hanging over our economy.” He urged MPs to come to an agreement on the path forward.
The OBR, an independent group, said the downgrade was due to surveys that suggest economic activity is weaker than expected because of the heightened uncertainty relating to the Brexit process. A recent survey by the Confederation of British Industry, a lobby group, found that for most companies Brexit uncertainty negatively affected sales and increased costs. “It’s time for Parliament to stop this circus,” said Carolyn Fairbairn, the CBI’s director-general.
But it might be worth taking these forecasts with a pinch of salt. If anything, it’s possible that they are too optimistic. The OBR is required to calculate its forecasts based on current government policy. At the moment, that is: “the UK makes an orderly departure from the EU on 29 March into a transition period that lasts to the end of 2020.” Given yesterday’s rejection of the deal on which this is based, there are considerable risks to the underlying forecasts. Even then, the OBR said it had “no meaningful basis on which to predict the nature of the future relationship between the UK and the EU” when making its predictions.
Hammond tried to express some optimism for the future of the UK economy, pointing to better-than-expected tax receipts and an unbroken stretch of economic growth as evidence of “a solid foundation.” But this, too, is based on the premise of the UK leaving the EU in an orderly fashion with a transition period to smooth the separation. The forecast for that is looking very hazy indeed.