(Bloomberg) --
A no-deal Brexit is now likely early next year, which will drag the U.K. into a recession and push inflation higher, according to Bloomberg Economics.
It forecasts a 0.2% contraction in output in 2020, based on the U.K. leaving the EU without a deal on Jan. 31 after getting an extension. That will follow an election that sees Prime Minister Boris Johnson's Conservatives winning the most seats and forming a government.
The new predictions come at the end of yet another tumultuous week in British politics. Parliament resumed sitting after a Supreme Court ruling said its suspension was unlawful, and there were angry exchanges between lawmakers over the government's plans.
“Crashing out of the EU with no-deal in January would deliver a blow to the economy. But relative to a no-deal exit on Oct. 31, the impact will be slightly less severe. Government and business will have had a few crucial months to prepare.”
--Dan Hanson
Read the full U.K. INSIGHT
BE's new report also forecasts that a drop in the pound, along with an increase in tariffs, will lift inflation to 2.8%. While that's above the Bank of England's 2% target, policy makers will still cut interest rates to support growth.
In a surprise move on Friday, policy maker Michael Saunders said the BOE may have to cut interest rates even if the U.K. avoids a no deal. The comments were sharp departure for someone who was previously considered the most hawkish member of the Monetary Policy Committee.
Read More: U.K. May Need Rate Cuts Even If It Avoids No-Deal, Saunders Says
BE isn't alone in noting the level of uncertainty. In a note this month, Barclays said there's a wide range of potential paths for the economy. Its central scenario, like BE, is an extension to January, an election, and a no-deal exit.
Given the range of probabilities, Hanson also sketches out some alternatives. If the U.K. secures a deal, that would help investment and the economy.
While the global slowdown will still prove a drag, the lack of spare capacity in the U.K. means the BOE would probably raise interest rates.
If Labour won an election, that would also remove no-deal uncertainty, though the chance of a second referendum could suppress any pickup in investment.
To contact the reporter on this story: Jiyeun Lee in Hong Kong at jlee1029@bloomberg.net
To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Fergal O'Brien, Brian Swint
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