MNI POLICY: NIESR Sees 3.5% Brexit Hit To GDP

--National Institute: PM Johnson Deal GDP Hit Larger Than May's Deal

By David Robinson

     LONDON (MNI) - The Brexit deal struck by Prime Minister Boris Johnson will

leave the UK economy 3.5% smaller than it otherwise would be, and have a greater

negative impact than the agreement struck by his predecessor, Theresa May, the

National Institute of Economic and Social Research said in its quarterly

forecast round.

     Treasury head Sajid Javid has refused to publish an impact assessment of

the deal, but NIESR's assessment was that it was clearly economically damaging.

NIESR also argued that there was a case for the Bank of England Monetary Policy

Committee to cut Bank Rate at next week's meeting given the state of the

economy, but it expects that the MPC will delay the cut until March next year.

     The following are key points from NIESR's projections and commentary:

     --The Brexit deal would reduce GDP compared to where it would have been

with continued European Union membership by 3.5% at the end of the forecast

horizon. By contrast, May's deal had a 3.0% hit on GDP and no deal would have

had a 5.6% hit.

     NIESR economist Arno Hantzsche said that while Johnson's deal did reduce

Brexit uncertainty it also eliminated any chance of a continuing close trading

relationship with the EU. May's deal had left the door open to a customs union

with the EU as part of a whole-UK backstop, but the latest version is centred on

paving the way for a free trade agreement with the UK outside both the single

market and customs union.

     -- Garry Young, a 17 year BOE veteran and head of forecasting at NIESR,

reckoned the Bank of England Monetary Policy Committee would continue to

condition its economic projections on a smooth transition to an average of

Brexit end states, with close EU alignment included.

     If the BOE were to follow its usual approach of taking government policy as

given, it would rule out the close alignment option when it publishes the

Inflation Report next Thursday.

     But Young said that while it would make things clearer if the MPC narrowed

its forecast range, with a December election up for grabs in parliament the

committee may see no benefit in narrowing its options.

     --NIESR's projections, on the assumption that the UK would move into an

extended transition period with the EU, were for 1.4% GDP growth in 2019 and

2020, unchanged from the growth rate in 2018, with inflation at 1.8% in 2019 and

bang on the 2.0% target in 2020. It foresaw Bank Rate being cut from 0.75% to

0.5% in the first quarter of 2020, without the need to restart asset purchases.

     NIESR head Jagjit Chadha said the UK economy had suffered "a slow

puncture," with elevated uncertainty and the risk of more restrictive trade

arrangements ahead taking the air out of growth.

     Under the Johnson deal the transition period during which current EU

trading arrangements persist would end in 2020 to be replaced by a free trade

agreement, but NIESR noted past precedent suggests that such deals cannot be

concluded in such a tight timeframe. This would leave another Brexit cliff-edge

looming at end 2020 and continued uncertainty, deterring business investment.

     --UK fiscal policy is expected to provide some support to output, with the

4% spending increase unveiled by Chancellor of the Exchequer Sajid Javid adding

0.3 percentage point to 2020 growth. At the same time the global backdrop has

deteriorated, with NIESR cutting its world growth forecast to 3.0% in both 2019

and 2020 from 3.25% and 3.5% respectively.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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