Britain’s potential exit from the European Union would provide a massive “shock” to the British economy, causing asset prices to rocket, GDP growth to fall, and sterling to drop by as much as 20% in the short term.
According the the National Institute of Economic and Social Research, a so-called Brexit “would represent a significant shock to the UK economy. This shock would be likely to manifest itself through a number of channels, some of which might be expected to be relatively short-lived, predominantly affecting the near-term outlook.”
The prediction is part of the NIESR’s latest National Economic Review and doesn’t present pleasant reading for advocates of Brexit. Here are some of the highlights:
- Sterling would fall 20% in the short term; prices would keep falling and the pound could reach parity with the euro by 2030.
- GDP growth would slip to just 1.9% in 2017, down from the 2.7% forecast.
- By 2030, Brexit would lower GDP between 1.5% and 7.8%.
- Again by 2030, UK consumption would fall as much as 9.2% compared to if Britain remains. That equates to roughly £2000 less spending per capita.
- By 2017, inflation would be “between 2-4% more than our Remain-based forecast.”
Here’s an extract from the NIESR’s research:
A decision to leave the EU would represent a significant shock to the UK economy. This shock would be likely to manifest itself through a number of channels, some of which might be expected to be relatively short-lived, predominantly affecting the near-term outlook. Others, such as the reductions in trade and foreign direct investment (FDI), would represent more permanent structural changes to the UK economy, and so would have important long-run implications.
Our analysis considers both, and builds them together into one coherent framework to generate a plausible view of what a vote to leave the EU may mean for the UK economy.
In the short run, the current heightened levels of uncertainty are likely to persist, if not intensify, as the UK establishes its place outside the EU. Financial markets are already pricing in a period of currency volatility around the referendum. It would also seem reasonable to expect an increase in credit premia across the economy, raising the cost of borrowing for the government, businesses and households.
The world that emerges is one in which sterling depreciates immediately, by around 20 per cent, against a basket of currencies. This drives inflationary pressure, causing CPI to jump by between 2-4 percentage points more than our Remain-based forecast in 2017. Meanwhile, GDP growth is around 0.8 percentage point lower next year compared with the counterfactual.
The NIESR is particularly downbeat on the chances for sterling post-Brexit, warning of a huge fall in the currency’s value, which would have huge knock-on effects. Here’s the institute once again (emphasis ours):
In all scenarios, the reduction in demand for UK exports leads to both declines in export prices and to a long-run and persistent depreciation of sterling to around parity with the euro. While the fall in sterling does allow export demand to rebound somewhat, this is still outweighed by the loss of access to EU markets, and exports fall by between 10 per cent and 29 per cent compared with a world in which the UK remained in the EU.
The weaker pound would also lead to higher import prices, feeding through into higher prices faced by households. Lower prices for our exports, coupled with higher import prices, leads to a persistent deterioration in the terms of trade. The UK benefits less from trade after leaving the EU than it would if it had remained, reducing long-run prosperity. By 2030, consumption is projected to fall by between 2.4 per cent and 9.2 per cent compared with a world in which the UK remained in the EU. This would translate into declines in annual consumption per capita of between £500 and £2,000 (at 2012 prices) by 2030.
This isn’t the first time that the NIESR has made grim predictions about the post-Brexit landscape in Britain. In late April, the institute warned that a reduction in immigration after Brexit could have “significant and damaging effects” for the UK.
It’s also not the first warning about the potential for a huge drop in sterling’s value. FX firm Caxton has issued several warnings about a potential currency crisis should the UK vote for Brexit and become a “rogue nation.”
The outcome of the UK’s Brexit referendum is far from certain, and according to the most recent Poll of Polls from non-partisan group What UK Thinks — released Monday — the Brexit campaign has steadily made up ground over the past two weeks and the two campaigns are neck and neck: 50/50.
The latest survey is an average taken across six opinion polls released between the April 25 and May 3. The graph below illustrates how the gulf between the two campaigns has narrowed since mid-April, to the point where there is virtually nothing to choose between them with June 23 fast approaching.