Brexit – five ways a vote to leave the EU could change Britain’s economy

If Britons vote to leave the European Union in June, the outlook for the UK economy would by most accounts be pretty bleak.

The Bank of England has warned of materially lower growth, a loss of jobs, collapsing wages and a slump in sterling. But would it really be that bad?

Here’s a look at some of the key predictions for the UK in the event of a Brexit.

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GDP

 

The central expectation is for a sizeable hit to UK GDP should the country leave the EU. The OECD estimates a cumulative reduction in GDP by 2030 of 2.7% to 7.7%. In the near term it says the economy would be 3% smaller by 2020 – equivalent to £2,200 for each household.

The Treasury’s own estimates suggest the economy would be 3.4% to 9.5% smaller by 2030. The National Institute of Economic and Social Research (NIESR) forecasts GDP to shrink by anything between 1.5% and 7.8% by 2030. Near term, it says growth in 2017 would be 1.9% against an expected 2.7% should the status quo prevail.

The wide ranges suggest even the most in-depth analysis of the effects of a Brexit are hard to measure as there simply too many unknowns.

Nevertheless, the consensus appears to strongly suggest GDP will shrink. However, even this is not a certainty, with some arguing the reverse will occur as the UK breaks free from the constraints of EU regulations.

Economists for Brexit say Britain’s economy say a vote to leave will boost the economy by 4% over ten years.

Sterling

 

One thing virtually everyone agrees on is that Brexit will create a weaker pound. Estimates vary a little, but there seems to be broad agreement that a drop of 20% for GBPUSD would be about right.

NIESR, HSBC, Goldman Sachs are among those expecting the pound to drop by a fifth against the dollar, which would send sterling to its weakest level in 30 years.

Gauging the pound versus the euro would be a lot hard. If Britain leaves there is going to be considerable pressure on the rest of the EU as the entire project gets called into doubt. A recent survey showed strong support among other Europeans to hold their own referenda on membership.

Inflation

 

Under Brexit, inflation would be 2-4% higher than if Britain stayed in the EU, according to the NIESR. That’s because of the expected weakness in sterling, which would drive up import prices for British consumers.

But the picture could be a little more complicated if the shock from a Brexit vote leads to households spending less and businesses delaying investment. Jobs could be lost, wages depressed and spending would take a dive.

Moreover, in the zero sum game of the currency markets, the euro would also be hit. Fears that Brexit contagion could spread across the continent are forecast to deliver a negative effect on the single currency – given the amount of trade between Britain and the EU, this would reduce the impact of a weak pound.

Interest Rates

 

The assumption is that a sliding pound and rising inflation will force the bank into hiking rates. But the counter argument is that a drop in aggregate demand in the UK economy will mean the Bank of England will actually lower rates and worry about inflation later.

According to the Bank of England’s May policy report, in this case it would be “a trade-off between stabilising inflation on the one hand and output and employment on the other.  The implications for the direction of monetary policy will depend on the relative magnitudes of the demand, supply and exchange rate effects”. 

Trade

 

While many of the effects are likely to be of short to medium-term in nature, NIESR and others believe that the impact on trade and foreign direct investment would be deep and permanent.  There is no clear picture of what the trade picture would look like post-Brexit. Talk about Albanian, Canadian, Swiss or Norwegian models are just that. Any deal on trade would have to be hammered out after the referendum and no one really knows what that would look like.

Economists for Brexit argue trade would be bolstered as a weak pound (they claim 8%) would lift the competitiveness of British exports and be a positive for trade. The Remain camp argues any benefit from this would be more than offset by exiting the world’s largest market.