The Bank of England on Wednesday warned that a “disorderly” no deal Brexit could push the UK into the deepest recession seen since the Second World War, and shrink the pound to the lowest level in its history.
An assessment of a variety of Brexit scenarios published by the central on Wednesday afternoon showed that UK GDP could shrink as much as 8% in a single year under the worst case scenario, far eclipsing the slump seen in the UK during the 2008 financial crisis. That slump was around 6.25%.
Alongside tumbling GDP, the UK could see the pound drop 25% and fall below parity against the dollar for the first time in history.
House prices would fall 30%, while inflation would climb above 6%, and policymakers would be forced to increase interest rates to 5.5%. Unemployment would rise to 7.5%, leaving hundreds of thousands of people out of work.
Under the “disorderly” scenario, the Bank of England sees the UK losing “existing trade arrangements that it currently has with non-EU countries through membership of the EU.”
“The UK’s border infrastructure is assumed to be unable to cope smoothly with customs requirements. There is a pronounced increase in the return investors demand for holding sterling assets. There are spillovers across asset classes,” it added.
The Bank of England was clear that none of the scenarios published today are forecasts of what it thinks will happen, rather they reflect what could happen.
“Our analysis includes scenarios not forecasts. They illustrate what could happen not necessarily what is most likely to happen,” it said.
“Our job is not to hope for the best but to prepare for the worst,” BoE Governor Mark Carney said in a press conference after the scenarios were released.
There was one small glimmer of hope in the Bank of England’s worst case scenario, with the central bank’s latest stress test showing that all major banks would be able to withstand such a downturn.
“The UK banking system is strong enough to continue to serve UK households and businesses even in the event of a disorderly Brexit,” the Old Lady of Threadneedle Street said.