EU sees UK economy tanking in first forecast assuming no-deal

The European Commission cut its forecast for 2021 U.K. economic growth almost in half, in its first ever regular outlook based on the assumption that negotiations for a post-Brexit trade accord will yield no result.

The projections see the economy growing 3.3%, down from 6% projected earlier this year. GDP will plunge by more than 10% this year, one of the worst performances expected in Europe, the commission said.

“The technical assumption of unchanged trading relations that has been used in previous forecast rounds is no longer appropriate,” the European Union’s executive arm said on Thursday. “The possible conclusion of an agreement on a partnership, including a Free Trade Agreement, would improve the outlook compared to the baseline.”

The projections for the U.K. have deteriorated compared to the commission’s summer forecast and are significantly worse than those for the EU and the euro area, where the 2020 recession is projected to be shallower than previously predicted. The bloc’s recovery next year is also expected to be stronger than Britain’s.

“In line with published studies, the simulation finds that the loss as percentage of GDP is much higher for the U.K. than for the EU,” the commission said in a brief impact assessment of a no-deal impact. The change from a seamless trade partnership to a relationship based on WTO terms will cost the EU 0.75% of gross domestic product by 2022, and the U.K. some 3%, according to the commission.

“The recovery in 2021 is expected to be subdued, assuming in this forecast EU-U.K. trading relations based on WTO Most Favoured Nation rules from the beginning of 2021,” the commission said. “While private consumption drives most of the rebound in 2021, business investment is expected to take longer to recover due to the longer-term effects of the pandemic and the need to adapt to the new, significantly less beneficial trading relations with the EU.”