By David Milliken and Kylie MacLellan
LONDON (Reuters) - Britain might be entering a full-blown recession that a no-deal exit from the European Union would compound, blowing a 30 billion-pound hole in the public finances, a budget watchdog said on Thursday.
As lawmakers prepared for a vote that could hinder any attempt by the next prime minister to pursue a no-deal Brexit, the Office for Budget Responsibility said the economy probably flat-lined or might have contracted in the second quarter.
Some of that weakness may have been payback after a rush to build up inventories before the original Brexit deadline in March.
"But surveys were particularly weak in June, suggesting that the pace of growth is likely to remain weak," the OBR said it said in a report on the outlook for the public finance.
"This raises the risk that the economy may be entering a full-blown recession."
Britain's economy slowed by less than feared after the 2016 Brexit referendum. But many investors are worried about a sharp downturn now with the latest Brexit deadline approaching on Oct. 31 and the world economy slowing because of trade tensions.
A no-deal Brexit could cause the economy to contract by 2% by the end of 2020, the OBR said, referring to International Monetary Fund forecasts.
It could also add 30 billion pounds ($37.4 billion) a year to public borrowing by the 2020/21 financial year, the OBR said, more than doubling the expected deficit.
The EU's chief Brexit negotiator, Michel Barnier, said in an interview to be published on Thursday that he was unimpressed by threats of no-deal Brexit, but that if the United Kingdom opted for such a course it would have to face the consequences.
Despite previous warnings of the damage that a no-deal Brexit could do to the economy, both contenders to become prime minister next week say they would leave the EU without a transition agreement to soften the shock, if necessary.
With a majority of Britain's lawmakers opposed to a disorderly exit, some have questioned whether Boris Johnson, favored to replace Theresa May, would suspend parliament in order to deliver Brexit by the next deadline.
On Wednesday he refused to say whether he would go ahead with such a plan, but he did say it could be convenient for him.
Sky News said on Tuesday that Johnson was considering holding the Queen's Speech, in which the prime minister lays out a policy program, in November. That means lawmakers would be sent home two weeks earlier, hampering their ability to stop Britain's leaving the EU without a deal on Oct. 31.
British lawmakers were due to vote on Thursday on a beefed-up proposal aimed at making it harder for either Johnson or his rival Jeremy Hunt to force through a no-deal Brexit by suspending parliament.
Concerns about a no-deal Brexit, which have weighed heavily on the value of sterling, have mounted as the leadership contest has progressed. The OBR said promises by the candidates of higher spending and tax cuts would also put a strain on Britain's finances.
"The spending control framework seems to be under pressure, with major announcements being made outside fiscal events, and the Conservative leadership making pledges that would prove expensive if pursued," it said.
Finance minister Philip Hammond, who supported Remain in the 2016 Brexit referendum, used the report to renew his criticisms of supporters of a no-deal Brexit
"I greatly fear the impact on our economy and our public finances of the kind of no-deal Brexit that is realistically being discussed now," he told Reuters on the sidelines of a Group of Seven finance ministers meeting in France.
(Additional reporting by Leigh Thomas in Chantilly, France and Guy Faulconbridge in London; writing by William Schomberg; editing by Larry King)