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.” |
But professor Chris Rowley of Cass Business School, points out that on both sides of the argument there are “extreme positions on economic, employment and trade impacts – from costing three million jobs and being shut out from EU markets, to freedom from rules and regulations”.
He says: “We’ve witnessed the well-planned onslaught of one-sided ‘Project Fear’ forecasts from the Remain side. They have raised issues of short-term shock and long-term problems – and are increasingly apocalyptic.
“The Leave campaign has hit back with economic analysis that the UK can exit without materially damaging the economy. This notes there are long-term alternatives – from trade deals to free trade – [and] economic gains from leaving, as well as the economic costs and risks of staying in the EU.
“Others have even raised the fact that, whereas 10 years ago, 50 per cent of UK trade was with EU, it is now down to 40 per cent and, as the rest of the world grows faster than the EU over the next 15 years, by 2030 [that figure will be] down to 30 per cent. Of course, firms are currently set up to take advantage of EU membership, so leaving will involve some disruption and shifting of investment.”
Keith Pilbeam, professor of international economics and finance at City University, adds that much of UK company investment is “heavily linked to having a guaranteed EU market of 27 other countries” that we can export to with certainty on a permanent basis – providing the UK remains part of the EU.
“The reason we attract so much foreign direct investment (FDI) is we have a fairly competitive economy and because we have guaranteed tariff-free access to the other 27 EU member states. If we vote to leave, then much of the FDI, associated investment and jobs will disappear and go to our competitors who do have access.”
Exiting the EU may prove slightly better than the “very, very bad” situation some institutions have predicted; equally, staying in the EU could be less positive than some have suggested. Either way, the UK will need to find a new way to interact with Europe and investors will have to deal with the economic implications.
Nyree Stewart is features editor at Investment Adviser
