Friday, June 03, 2016

The Economist magazine's view of the effects of Brexit

The Economist magazine has put together their estimate of the impact if the UK votes to leave the European Union which I quote here without either endorsing it or criticising it.

They estimate the hit as six percentage points of GDP in short term disruption and lower growth over the next four years.

You can read the full collection of articles here.

To forestall the standard Leave attacks which are usually made, almost irrespective of whether they are actually true, on anyone who opposes their economic arguments, to the best of my knowledge and recollection the Economist is not funded by the EU, and did not campaign for British entry to the Euro.

They published a survey in 1999 which you can read here of the arguments put by economists both supporting and opposed to such a move without apparently coming down on either side, and correctly predicted here in 2001 that Blair would not risk attempting to join the Euro anytime soon. They suggested in 2003 that entry might have more benefits than drawbacks but only given certain conditions - which were never met. The magazine recently published a statement that it had always been cautious about Britain joining the Euro.

The Economist magazine was also strongly opposed to the Lisbon treaty. They once published a cover showing a dustbin and the words "where to file Europe's new constitution," referring to what was then proposed as a constitution for the EU before ultimately becoming the Lisbon treaty.

So they cannot be described as knee-jerk Europhiles.

A summary of their view is as follows:

"Brexit" will cost 6% of GDP
  • Should the UK vote to leave the EU on June 23rd, the country's economic environment will be dominated by uncertainty. We expect significant volatility in the financial markets and a sharp depreciation in the pound.
  • We assume that the government would act swiftly to alleviate uncertainty, notifying the EU of its intent to withdraw and outlining plans for a potential new trade arrangement. This would happen by the end of the year.
  • Negotiations with the EU would then take place in 2017-18, during which time the economy would be experiencing the second-round effects of the initial shock, including higher inflation, rising unemployment and falling investment. A slump in domestic demand would mean that the greatest hit to the economy would be felt in 2017.
  • We assume that a deal involving restrictions on free movement of labour, access to the single market for goods but significant barriers to the market for services would come into force in 2019. This would lead to a fall in the labour force and a step decline in services exports.
  • By 2020 we forecast that real GDP would be about 6% below our non-"Brexit" baseline forecast. Unemployment would peak in 2018, reflecting a 380,000-person increase relative to the baseline.


Jim said...

I think the basic assumptions are wrong. Basically they are assuming a Leave the single market stance (pretty much as the remain camp are doing) which of course is not the action any sensible government would take.

Roland highlighted why in his piece here

Chris Whiteside said...

I would agree with you that a "Flexcit" strategy would not produce anything like the economic hit which The Economist's assumptions predict.