No-deal Brexit is a tripwire into economic chaos

The incoming UK prime minister faces a gargantuan task. Not since the second world war have times been as turbulent, or the responsibility for national and economic security as serious.

At the heart of the challenge lies Brexit. It is a political decision with far-reaching economic consequences, and we in business have played a vital role in informing people and politicians about what might happen to jobs and living standards as a result.

But there’s now a twist in the Brexit tale that makes the corporate voice more important than ever. Both of the top contenders to head the Tory party and the country — Boris Johnson and Jeremy Hunt — have pledged to take Britain out of the EU by the end of October, without a deal if need be. In Europe, where I spent much of last week, leaders are becoming resigned to this outcome.

Fatalism is setting in. This whole process is exhausting. Everyone is fed up. No deal can feel like a clean break, a way out of the mess. When I ask what people most want from Brexit, many say “for it to be over”. But here, the message from business groups must be deafeningly clear, or we are not doing our job. A no-deal Brexit is not a clean break. It will not mean Brexit is over, for the UK or the EU. It will not mean an end to uncertainty for business.

Quite the opposite. No deal is a tripwire into economic chaos that could harm our country, and the EU, for years to come. And let me set out why, using evidence we have today. These are not the much derided “Project Fear” predictions of 2016. This is Project Reality.

Business sees the impact of no deal in four stages, over many years. The first is what we’re experiencing now — the negative impact of the threat of no deal. Business investment fell for four consecutive quarters last year. EY has confirmed the bill for no deal planning among financial services companies alone has reached £4bn. The CBI’s latest sector survey says confidence continues to drop. This week’s data, from across construction, manufacturing and services sectors suggest that the UK economy has, at best, been at standstill in the second quarter.

The second stage is the physical business disruption from the exit itself. As border checks are introduced, delays at ports will build as backlogs grow. Automotive manufacturers can only stockpile for three weeks, adding 1,100 trucks a day during Black Friday and the run-up to Christmas.

Room to create buffer stocks is scarce. The UK Warehousing Association stated “there is no space left” and supermarkets Sainsbury’s, Asda and Tesco have warned that an October no-deal exit is “as bad as it gets”. The last three months of the year are when most fresh food is imported from Southern Europe — it cannot be stored. Meanwhile, services companies that haven’t planned ahead will need to withdraw from providing certain sales and services by phone and email, and those that require travel to the EU.

The third stage, much underestimated, is a period of prolonged negotiation with the EU to repair trade damage. No deal is not a viable resting place. It leaves too many gaps and holes. The UK will be forced back to the negotiating table whether we like it or not. Having to find a solution to the Irish border, at the very least, makes this inevitable.

There are many areas where contingency plans are lacking including the free flow of data, which supports the UK’s £117bn digital economy, and the export rights for farmers of dairy, meat, eggs and honey. Lorry licences have only been granted for nine months.

But the fourth stage is perhaps the most serious — the slow puncture of the UK’s lost competitiveness. Unless and until a new trade deal is forged, the UK would face tariffs on 90% of its EU goods exports, by value. Our manufactured goods will become less competitive and businesses will be tied up in new red tape. The EU will apply double testing in areas from children’s toys to high-viz jackets. Services providers, from broadcasting to insurance, who account for 80% of the UK economy will be forced to shift operations to Europe to maintain market access.

No deal is not a panacea, not a clean break and not an end to uncertainty. And Mr Hunt’s and Mr Johnson’s prescriptions for shoring up the UK economy are short on reason, as the Institute for Fiscal Studies has said. Businesses aren’t crying out for corporation tax cuts. Nor are they clamouring for red tape to be slashed. Yet we are currently sleepwalking into a no-deal Brexit on the back of these misconceptions.

So what needs to happen? The Tory leadership candidates must put as much effort into agreeing a deal as preparing for a no deal exit. This should be their top priority. Otherwise, we will all discover too late that no deal does not free the UK from gridlock, but instead prolongs it for years to come.

Originally published in the Financial Times