Britain is due to leave the European Union on April 12 unless Prime Minister Theresa May can break the deadlock in parliament or asks Brussels for more time, raising the prospect of an abrupt, no-deal Brexit for the world’s fifth-biggest economy.
EU officials said on Tuesday that a no-deal Brexit was becoming more likely and the European Central Bank said financial markets needed to price in the growing risk.
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 has said the economy could be 8 percent smaller by 2035 after a no-deal Brexit than if Britain stayed in the EU. The hit would be bigger if migration slowed sharply, the ministry has said.
The BoE also sees a risk in Britain’s wide current account deficit. Governor Mark Carney has said the deficit leaves Britain reliant on “the kindness of strangers” and a no-deal Brexit could turn foreign investors off British assets.
Brexit supporters have dismissed the warnings as scare-mongering but say economy is likely to suffer a short-term hit. Former BoE Governor Mervyn King has said the long-term costs of Brexit might not be very different from staying in the bloc.
Barriers to trade would be raised for British companies as the EU imposes import tariffs which average 5 percent but are higher for some exports such as cars. Britain’s automotive industry employs more than 800,000 people.
Britain would also lose the benefits of the EU’s trade deals with countries around the world.
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 also worried about border delays which would hurt their just-in-time production.
Brexit supporters say those fears are overblown because technology would ease any border delays and exports would flow freely once Britain gets a future EU free trade deal.
Deals with faster-growing nations such as the United States, India and China would be a big boost for Britain, Brexit supporters say. But Britain’s official budget forecasters say the benefits of such trade deals are likely to be small.
PORTS AND STOCKPILING
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 tail-backs at ports on the English Channel.
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.
Many manufacturers are stockpiling parts to keep working. A measure of inventory-building hit the highest ever measured for a Group of Seven economy in March. Britain has asked drugmakers to stockpile medicines for six weeks above normal operations.
Brexit supporters point to comments by the head of the port in Calais, in France, who said trucks would continue to move through without delays in the event of a no-deal Brexit.
France has said it plans to hire hundreds of additional customs officers and create extra border control facilities.
HELP FROM THE BUDGET AND THE BANK OF ENGLAND?
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, longer term, a no-deal Brexit would mean a rethink of his promise to end austerity because the economy would grow more slowly, hurting tax revenues.
Brexit supporters say 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 rush to cut borrowing costs after a no-deal shock. A fall in the value of the pound would push up inflation, something that would argue against a rate cut.
But some officials, including Carney, have said their most likely response would be to help the economy.
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 13 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 Labour Party has plans for more public spending, potentially including the renationalisation of some utilities and rail operators, which might unsettle investors.