Disorderly Brexit Could Have `Severe' Impact, U.K. Watchdog Says

(Bloomberg) -- The U.K. could experience shortages of vital imports, a sharp fall in the pound and higher prices in the shops in the event of a disorderly Brexit, according to the Office for Budget Responsibility.

The fiscal watchdog issued the warning Thursday in a paper outlining the task it faces to assess the economic and fiscal consequences of Britain leaving the European Union.

Its current projections are based on the assumption that the two sides reaching an agreement but a no-deal Brexit could hit the British economy hard, leading to higher budget deficits and government debt, the OBR said.

“A disorderly exit is not impossible and it could have a severe short-term impact on demand and supply in the economy and on the public finances,” the OBR said. “U.K. asset prices could fall sharply which, together with heightened uncertainty, would cause households and businesses to rein in their spending.

“A fall in the pound would also raise domestic prices, squeezing households’ real incomes and spending,” it added. “And there could be temporary constraints on supply if, for instance, a lack of customs preparedness led to significant delays at the border. It is next to impossible to calibrate this sort of scenario with confidence because of the lack of precedent.”

Lost Output

The OBR noted that studies based on the performance of countries that had similar growth rates and characteristics to the U.K. prior the 2016 referendum suggest the economy has lost as much as 2.5 percent of output as a result of the decision to leave the EU.

With Brexit day less than five months away, hopes are growing that Britain and the EU will clinch an agreement in the coming weeks. An accord is needed to unlock a planned 21-month transition period and avoid the immediate imposition of tariffs.

However, the OBR warned it is far from clear that any divorce deal and declaration about future trade ties will be sufficiently detailed to update its current assumptions, and “it would certainly be too late to do so in our forthcoming budget forecast” on Oct. 29.

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