The EU referendum debate has started to focus on the economic fallout of a leave vote for the UK – and also for Europe.
Research from the Organisation for Economic Co-operation and Development (OECD) released in April suggests a Brexit vote could see UK GDP growth contract by 3.3 per cent by 2020, and by 2030 the central base-case scenario means a GDP contraction of 5.1 per cent.
It adds the economic consequences of a leave vote could also spread beyond the UK, with European GDP growth contracting around 1 per cent by 2020.
In a speech presenting the findings, however, Angel Gurría, secretary-general of the OECD, said the estimates – not just from the OECD but also the London School of Economics and HM Treasury – “are too cautious”.
He explains: “For one thing, [the estimates] focus entirely on future effects, whereas in fact the first payments of the ‘Brexit tax’ are already being made.”
Referencing ONS figures in April that showed the lowest quarterly UK GDP growth since 2012 and weaker business investment, Mr Gurría added: “Brexit costs can also be seen in financial markets. Since the autumn, the pound has weakened against the euro and the dollar, and the cost of insuring against exchange rate volatility has risen.”
More recently, both Mark Carney, governor of the Bank of England, and the International Monetary Fund have warned leaving the EU could push the UK into a “technical recession”.
But as the economic debate seems to favour the ‘Remain’ camp, the Leave campaign has put forward its own assessment, with eight economists publishing the pamphlet ‘The Economy after Brexit’.
The paper argues that a Brexit scenario would, in the medium and longer term, “deliver higher growth, with increased jobs and investment, and higher living standards, especially versus remaining in an unreformed EU”.
Assumptions made in this model include a gain in consumer living standards from leaving the EU customs union of 3.2 per cent due to a fall in tariff equivalents, and a 0.8 per cent gain resulting from improved terms of trade.
The net EU budget contribution, 0.8 per cent of GDP, is assumed to be returned to UK consumers as an income tax cut, while a reduction in regulation is modelled as a 2 per cent fall in the rate of national insurance for employers.
These assumptions suggest that UK GDP growth would increase from 2.4 per cent in 2017 on a pre-Brexit forecast to 2.7 per cent post-Brexit, rising to 3.4 per cent growth by 2020.
|Brexit economic impact: Expert view|
Pieter Jansen, senior strategist insurance at NN Investment Partners, says:
“The short-term economic consequences of Brexit would flow from the degree of uncertainty. There may particularly be worries whether other countries may want to follow the same path.
“As a result of that, we may see market volatility and some spillovers into economic confidence across Europe as well. These may be temporary setbacks. For the UK, the main challenges will probably take place in the long run. Trade agreements have to be renegotiated with the EU, this will take many years. These new trade deals will most likely be less favourable for the UK and will come at a long-term growth cost.
“At the same time, the role that London plays as the financial centre for Europe is unclear, but most likely there will be negative consequences here as well.”