LONDON (Reuters) - Boris Johnson, the front-runner to be Britain’s next prime minister, has raised the prospect of a shock for the world’s fifth-biggest economy by pledging to leave the European Union on Oct. 31 without a transition deal if necessary.
Johnson’s rival, foreign minister Jeremy Hunt, says he too would be prepared to lead Britain into a no-deal Brexit, but would be more flexible about the departure date.
Here is an outline of the potential economic impact for Britain of leaving the EU without the cushion of a transition.
The Bank of England estimates a worst-case Brexit - involving border delays and markets losing confidence in Britain - could shock the economy into a 5 percent contraction within a year, nearly as much as during the global financial crisis.
Output in a less severe but still disruptive no-deal Brexit - in which Britain and the EU avoid snarl-ups at the borders, for example - would fall by around 3 percent.
Over the longer term, Britain’s finance ministry says the economy could be 8 percent smaller by 2035 after a no-deal Brexit than if it stayed in the EU. The hit would be bigger if migration slowed sharply.
The BoE also sees a risk in Britain’s wide current account deficit which leaves Britain reliant on “the kindness of strangers,” in the words of Bank Governor Mark Carney. A no-deal Brexit could turn foreign investors off British assets.
Brexit supporters have accused the BoE of scare-mongering but acknowledge the economy is likely to take a short-term hit. Former BoE Governor Mervyn King has said Brexit’s long-term costs might not be very different from staying in the bloc.
Brussels says a no-deal Brexit would mean British exports would be hit with import tariffs which stand at around 2-3 percent for non-agricultural goods but are higher for some goods such as cars and farm products.
Johnson says Britain could avoid those tariffs, under world trade rules. That claim has been rejected by the BoE’s Carney, trade minister Liam Fox and the EU’s top trade official who say it would need an agreement with the EU.
For its part, Britain plans to eliminate import tariffs for many products for up to a year in the event of a no-deal Brexit. That would help reduce the inflationary hit to consumers but would expose many British companies to tougher competition.
Manufacturers are worried about border delays which would hurt their just-in-time production schedules.
Britain’s auto industry group has said delays could cost 50,000 pounds every minute in a worst-case scenario.
Brexit supporters say the use of cameras and tracking technology would ease any border problems and that exports would flow freely once Britain gets an EU free-trade deal.
Deals with faster-growing nations such as the United States, India and China would be a big boost for Britain, they say.
But Britain’s official budget forecasters say the benefits of such trade deals are likely to be small.
The government has identified stretches of motorway to use as truck parks, and plans to use a small airport in southern England to cope with any tailbacks at ports.
Academics at Imperial College say two extra minutes spent checking each vehicle at Dover and Folkestone could lead to traffic queues of 29 miles (47 km) on nearby highways.
Fearing delays, many manufacturers and retailers stockpiled parts and goods ahead of Britain’s original March Brexit deadline, leaving little warehouse space in the country.
Tesco, Britain’s biggest retailer, has said a no-deal Brexit in October would be far more problematic than preparations it made for the original planned departure date in March because of the approach of the busy Christmas season.
Finance minister Philip Hammond has built up a fiscal war-chest to spend more in case of a Brexit shock to the economy.
But he has also warned that a no-deal Brexit would jeopardise the government’s plans to end austerity because the economy would grow more slowly, hurting tax revenues.
Johnson and Hunt have said they would cut taxes if they become prime minister, putting further strain on the budget.
Some Brexit supporters have said leaving the EU with no deal would help the public finances because it would mean an immediate end to payments by London into the EU budget.
The BoE has warned investors not to assume that it would cut borrowing costs after a no-deal shock because a fall in the value of the pound could push up inflation.
But some officials, including Carney, have said their most likely response would be to help the economy with lower rates.
Given the likely economic hit, a no-deal Brexit would probably push the pound down, adding to its losses against the U.S dollar of about 15 percent since the 2016 referendum.
Under the BoE’s worst-case Brexit scenario, sterling would slump 25 percent to about the same value as the U.S. dollar.
A weaker pound could push up the share prices of many of Britain’s biggest companies which do business around the world such as British American Tobacco and GSK. The companies in the FTSE 100 make 70 percent of their income overseas.
But there could be punishment for the more domestically focused FTSE 250 companies who make half their money at home.
The economic shock of a no-deal Brexit would usually spur investors to seek the safe haven of British government bonds.
However, investors are bracing for the possibility of a snap election. The main opposition Labour Party has plans for more public spending, including the renationalisation of some utilities and rail operators, which might unsettle investors.
Writing by William Schomberg; editing by Stephen Addison