Johnson's win elevates 'no-deal' Brexit risks to UK economy

LONDON (AP) — With Boris Johnson confirmed as the next U.K. prime minister, the outlook for the British economy has become murkier — and potentially more perilous.

Johnson's comprehensive victory over Jeremy Hunt in the battle to lead the governing Conservative Party has made it more likely that Britain could leave the European Union on Halloween without a withdrawal agreement, leading to tariffs and broad disruptions to trade.

Most economists think such a "no-deal" Brexit would cause a deep recession.

Whether it would be as deep as the one after the global financial crisis — a contraction of more than 6% in the economy — no one knows, but almost all economists agree that jobs will be lost and the pound will slide.

And its impact could sap business confidence more broadly: the International Monetary Fund said Tuesday that a "no-deal" Brexit represents one of the key risks to the world economy.

A "no-deal" Brexit means that on Nov. 1, tariffs will be slapped on goods traded between the U.K. and the remaining 27 EU countries. Other impediments to trade would be imposed, such as new restrictions on the movement of people and regulatory standards, including on Britain's crucial financial services sector. Britain would also face the prospect of losing trade deals the EU has struck over the years, including with Canada and Japan — these account for around 11% of U.K. trade.

That raises the stakes for companies like the operator of the Channel Tunnel between Britain and France, which warned Tuesday that a no-deal Brexit is now "very likely." British business associations quickly issued statements after Johnson's election urging him to secure a deal.

Richard Branson, the Virgin Group founder whose has gone from owning a record label to planning flights to space, is among the high-profile business leaders who have also spoken out publicly against a no-deal Brexit. He believes the pound will slump in value to be worth just a dollar for the first time ever.

The currency has borne the brunt of Brexit uncertainty, falling more than 10% from $1.50 on the day after the June 2016 referendum. It's near two-year lows at $1.2450.

Though both sides of the English Channel will suffer in a "no-deal" scenario, Britain would suffer more. British exports to the EU account for around 13% of the country's annual GDP, against around 3% of the GDP of the other 27 EU nations.

Planning for a no-deal Brexit, which Johnson is expected to accelerate in his first days in 10 Downing Street, will help marginally.

Measures such as stockpiling medicines, sourcing more products from outside the EU, or modifying road links in southeast England to manage freight traffic can help, but only up to a point.

"Planning is unlikely to do much to mitigate the short-term disruption of 'no deal'," said John Springford, deputy director at the Centre for European Reform.

For one, he said, there is too little time to build new border and road infrastructure to reduce congestion at the Channel Tunnel and ferry crossings and on the highways that bring trucks up toward London.

In his pitch to become prime minister, Johnson said he wants an agreement but that he would make sure Britain leaves the EU on Oct. 31.

The U.K. Parliament is seemingly opposed to a "no-deal." Many Brexiteers have suggested that Johnson suspend parliament to allow Brexit to happen anyway. The implications of that would be unpredictable. Johnson has said he doesn't want to go down that path but hasn't ruled it out.

Given these uncertainties, business executives are unsure how to plan and have reined in investment over the past two years. That's one of the main reasons why Britain's economy, which by some estimates is second only to Germany in Europe, has stuttered and talk of a recession has grown.

"With economic growth already faltering, a disorderly 'no-deal' Brexit could cause widespread disruption to trade, a sharply lower exchange rate, higher inflation and lower living standards," said Arno Hantzsche and Garry Young of the National Institute of Economic and Social Research.

Johnson could push for a general election in the fall if he fails, as expected, to renegotiate May's agreement. With opinion polls showing Britain's electorate splintered, several outcomes are possible, including one whereby a new government backs another referendum to reverse the initial result.

Johnson could equally opt to ditch his "do-or-die" pledge and seek another extension, giving him time to put a crowd-pleasing tax-cutting budget in place for an election next year.

Whatever happens — and given this is Brexit, anything can — the British economy is set to remain stuck in the mud for months. How it pans out will hinge on the decisions Johnson makes in his first weeks in power.

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