Failure to seal post-Brexit deal would more than halve UK growth, says KPMG

By Richard Partington Economics correspondent

Failure to strike a post-Brexit trade deal would cut the UK’s economic growth rate by more than half next year, delaying a full recovery from the coronavirus pandemic, according to a report.

The accountancy firm KPMG said the economy would suffer heavily should the UK fail to secure a trade deal with the EU before the end of the Brexit transition period at the end of December, just as the country attempts to escape the deepest recession since records began.

Warning that companies were not ready for such an outcome after a year of turmoil triggered by the pandemic, KPMG said GDP growth would be 4.4% in 2021 without a deal, comparedwith 10.1% if the UK and the EU maintained existing relations.

With businesses ill-equipped to cope with disruption at the borders, leaving on World Trade Organization terms would delay the point at which the UK economy recovered its pre-pandemic peak until 2024 – two years later than would otherwise be the case.

The forecast comes as talks between London and Brussels reach a critical phase this week, with both sides still unable to reach a deal over key areas, including fishing rights and fair competition rules for business. Under an emergency EU plan, a European parliament vote to seal a deal could be delayed until 28 December, three days before the end of the transition period.

KPMG said it still expected a last-minute agreement would be reached, although warned any Brexit deal would still come with costs for the economy because it would be less comprehensive than EU membership.

Forecasting a hit to cross-border trade and reduced levels of foreign direct investment in the UK under a limited deal, the accountancy firm said GDP growth was expected to be 7.2% in its central scenario next year, with the UK economy returning to its pre-pandemic peak by the end of 2022.

GDP is expected to fall by 11.2% this year as Covid-19 and lockdown measures to contain the spread of the disease cause unprecedented disruption for companies.

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The accountancy firm said an early vaccine would enable momentum in the economy to accelerate from early next year, forecasting the lifting of all social distancing restrictions from late spring that would deliver a boost to consumer-facing and travel sectors in particular.

Yael Selfin, the chief economist at KPMG UK, said the economic boost for all advanced economies from an early vaccine would be undermined by Brexit. “The impact of Brexit will single the UK out among advanced economies next year,” she said.

“There will be changes even with a deal, but the initial destruction next year would be sharper without one. We’re hopefully out of the woods when it concerns Covid, but we must still remember the UK is entering another period where there is still going to be some sort of a shock.”