UK's new Brexit deal worse than continued uncertainty - NIESR

By David Milliken

LONDON (Reuters) - Prime Minister Boris Johnson's Brexit deal would hurt Britain's economy more than further delays and continued uncertainty about leaving the European Union, a think tank said on Wednesday.

Late on Tuesday, Johnson won parliament's support for an election in early December that he hopes will break the Brexit deadlock and lead to the approval of the deal he clinched with Brussels earlier this month.

Johnson has said his deal is the only solution to the uncertainty that has weighed on the economy since the 2016 referendum.

By contrast, the opposition Labour Party wants to negotiate a new deal and put it to a second referendum, which could overturn 2016's result.

Johnson's Brexit plan opens the door to much looser economic ties between Britain and the EU.

The National Institute of Economic and Social Research (NIESR) said that the economic cost of a more distant relationship would outweigh the gains from ending Brexit uncertainty.

"We don't expect there to be a 'deal dividend' at all," NIESR economist Arno Hantzsche said. "A deal would reduce the risk of a disorderly Brexit outcome but eliminate the possibility of a closer economic relationship."

Unlike his predecessor Theresa May's deal, Johnson's does not require England, Scotland and Wales to stay in a customs union with the EU in the future, making tariffs and other barriers likely after a transition period.

NIESR estimated that in 10 years' time, Britain's economy would be 3.5% smaller under Johnson's plan than if it stayed in the EU - roughly equivalent to losing the economic output of Wales.

In a scenario of ongoing uncertainty similar to now - where Britain keeps the economic benefit of unrestricted access to EU markets but without any long-term guarantees - the economy would be 2% smaller, it forecast.

May's deal would have limited the damage to 3.0%, while a no-deal Brexit would make the economy 5.6% smaller than if it stayed in the bloc, NIESR said.

Earlier this month another academic think tank, UK in a Changing Europe, estimated Johnson's deal would make Britain more than 6% poorer per head.

In the nearer term, NIESR said the Bank of England should cut interest rates to 0.5% from 0.75% at a meeting next week, but said it did not expect the BoE to act until March, when Governor Mark Carney's successor is due to be in place.

The BoE has been an outlier among major central banks in not loosening policy as the global economy slows.

NIESR said inflation was likely to undershoot the BoE's target, especially if sterling rallied on the basis of a reduced risk of no-deal Brexit.

The think-tank forecast Britain's economy would grow 1.4% this year and next, assuming no major short-term change to Britain's relationship with the EU, down from 1.6% in 2018 and well below its long-run average.

(Reporting by David Milliken; Editing by William Schomberg)