On Wednesday morning the government published its analysis of the potential long-term economic impacts of various Brexit scenarios, including the deal it favours.
Later in the day the Bank of England gave its assessment of the likely impact of a “disaster” scenario, in which the UK crashes out of the EU in March, without a deal.
It’s pretty horrific. The Bank’s “Disorderly Brexit Scenario” makes a set of extreme, worse-case assumptions.
The Bank decides that trade between the UK and the EU would be disrupted by tariffs and non-trade barriers as World Trade Organisation rules are applied.
It envisages that while the UK recognises EU standards, the EU does not reciprocate.
It assumes that the UK fails to negotiate any new trade deals before 2023 and loses access to existing trade agreements between EU and third countries.
At the border, the Bank imagines severe disruption.
The impact is considerable. Bank Rate, and therefore interest rates, rise to 5.5%, financial conditions tighten and households and businesses rein in their spending.
The result, as modelled by the Bank, is pretty devastating.
The UK economy hurtles straight into recession. GDP slumps by 8% almost immediately - a greater fall than we experienced during the financial crisis. Indeed, at the end of the five-year forecast period, output remains 7.75% lower than the Bank forecast in November this year.
The Bank's analysis suggests that the unemployment rate would jump to 7.5% and the pound would fall in value by 25% against the dollar, sending inflation up to 6.5%.
House prices would fall by 30%, commercial property values by 38%.
There are some politicians who argue that 'Hard Brexit' would not cause hardship, that there would be short-term disruption, nothing more. The Bank’s vision of 'Hard Brexit' is borderline apocalyptic.
Is the Bank too pessimistic? Some scoff at the idea of bottle-necks and tailbacks from Dover. The Bank points out that 14% of small business have no plan for 'Hard Brexit' - 250,000 have never filled in a customs declaration. Most of HMRC’s new customs IT systems won’t be up and running by March next year.
Would the Bank really hike interest rates in the face of recession? The Bank believes it would have no choice. Its job is to target inflation and it argues that monetary policy would not be an effective antidote to what would be a severe economic supply shock.
The good news, such as it is, is that the Bank believes that if the UK were to leave the EU next March, chaotically, without a deal, without an agreed transition period then our banking system would survive intact, without needing support from the taxpayer (who will have quite enough on their hands).
The Bank’s annual stress tests of the resilience of our seven biggest lenders reveal that they would all withstand the shock of a disorderly Brexit and continue lending to households and businesses.
In addition to disorderly Brexit, the Bank stress-tested Barclays, HSBC, Lloyds, Nationwide, RBS, Santander and Standard Chartered as part of it’s standard annual scenario, which includes a severe global financial crisis even worse than disorderly Brexit. Once again, they survive intact.
The message here is that while Britain generally isn’t adequately prepared for the consequences of crashing out, the banking system is, which should be of considerable reassurance.
The vague nature of Britain’s future trading relationship with the EU, as spelled out by the political declaration, has been highlighted in recent weeks.
At the request of the Treasury Select Committee, The Bank attempts to model both a “close” and “less close” (with some trade barriers) future trading relationship. Both outcomes are benign compared to the disorderly scenario.
The key point of difference is that in both scenarios the Bank assumes that Britain secures a transition period until the end of 2020 to prepare for the new trading terms.
The benefits of transition, as the Bank models them, are stark. In the close, frictionless, Chequers-type outcome the Bank models, GDP increases by 1.75% more by 2023 than the Bank forecast last month and interest rates “rise gently”.
The Government will no doubt hope that the vast difference in outcomes between a extreme, disorderly supply shock and orderly journey to a new trading relationship will focus MPs minds. If the Bank’s modelling is to be believed, and there will inevitably be doubters, then no deal would be an extraordinary act of self harm and is almost unthinkable.