Brexit to blow £50bn hole in UK’s economic recovery from coronavirus pandemic, says KPMG

Brexit could cut tens of billions of pounds from economic growth next year, hampering the UK’s recovery from the deepest downturn on record, according to a report.

The end of the coronavirus pandemic is likely to mark the beginning of a “new way of living and a new approach to life”, economists at KPMG forecast.

But they warn that adjusting to this new reality will be made harder by uncertainty and frictions at the border with the UK’s biggest trading partner.

Manufacturing sectors hardest hit by Brexit, including textiles, chemicals and electrical goods, could see output remain as much as 12 per cent down on pre-pandemic levels by the end of next year, KPMG said. 

Bottlenecks in supply chains, border delays, additional paperwork and falling investment were all flagged as potential causes of falling production.

In all, Brexit is forecast to shave 2.9 percentage points from UK growth next year, with the economy not reaching pre-Covid levels until the end of 2022. That equates to a more than £50bn reduction in growth.

The report forecasts that lockdown measures will cause gross domestic product to fall 2 per cent in the final quarter of this year, resulting in an 11.2 per cent annual decline followed by a 7.2 per cent expansion next year.

Chancellor Rishi Sunak's last-minute extension of the furlough scheme has likely forestalled a sharp increase in unemployment this year, KPMG said, but unemployment is set to peak at 7.8 per cent in May next year before gradually falling as the economy continues to recover.  

The analysis assumes that a slimmed-down Brexit deal is agreed in time, which excludes services, and a vaccine is ready to be rolled out early next year, which brings about the end of social distancing restrictions by late spring.

EU and UK negotiators are again meeting this week for talks as time runs out to reach a deal. 

“The impact of Brexit will single the UK out among advanced economies next year,” said Yael Selfin, chief economist at KPMG UK.

“While the government will need to address the short-term needs of businesses, as they cope with the transition to a new trading relationship, it is also important that it increases investment in the infrastructure and skills that will be needed in order to alleviate the longer-term impact Brexit will have on productivity and growth.”