15 October 2018

Open Europe today published its report, ‘No Deal: The economic consequences and how they could be mitigated.’

This macroeconomic study of the impact of a ‘No Deal’ Brexit concludes that a UK withdrawal from the European Union without a preferential trade deal would not be ideal and would bring some material costs. However, it would be a relatively mild negative economic event. Brexit will therefore not be the determining factor for the UK economy’s medium-term growth prospects. Open Europe’s strong recommendation remains that the Government seeks to secure a negotiated exit from the EU, while also being prepared for all scenarios including a ‘No Deal’ exit in March 2019.

Our model suggests that a No Deal Brexit would mean the UK economy continuing to grow but with an effect equivalent to an average annual drag of -0.17% on real GDP growth over the 13 years up to 2030. This could be reduced to an average reduction in growth of -0.04% a year if the government deploys maximum mitigation measures in the form of unilateral trade liberalisation. The economic impact of an exit on so-called WTO terms is, over a 13 year period, small. And as we go on to demonstrate, the effects are limited in comparison with the forecasting noise typically seen in GDP models.

Key Findings

Open Europe’s new study of the macroeconomic impact of a No Deal Brexit comes to three important conclusions:

  1. UK withdrawal from the European Union without a preferential trade deal is sub-optimal and would bring a small material economic cost equivalent to an annual drag on growth of -0.17% per annum for thirteen years to 2030. However this cost is limited in absolute terms, but also relative to other factors affecting medium term UK economic growth. To put this in context estimates suggest that the construction of an additional 30,000 houses per year would more than compensate a -0.17% drag on GDP. We agree with the Office for Budget Responsibility’s conclusion that the impact of Brexit “is likely to be relatively small compared to the degree of uncertainty surrounding the underlying path” of UK economic growth.
  2. This economic drag could be reduced to an average reduction in growth of -0.04% a year if the government deploys maximum mitigation measures in the form of unilateral trade liberalisation.
  3. Whilst the costs of ‘no deal’ are material, they are much milder than is generally assumed and the terms of the UK’s departure from the EU are very unlikely to be the determining factor for the UK economy’s medium-term and long-term growth prospects.

There are two elements to this study:

  • The first quantifies the impact of a No Deal Brexit against a baseline projection of future UK economic performance. The modelling exercise includes the assumption that a tariff wall and customs border would be imposed between the UK and the EU, and accounts for the emergence of some non-tariff barriers to UK-EU bilateral trade.
  • The second quantifies the UK’s ability to mitigate the effects of a No Deal Brexit by unilaterally removing UK tariffs on EU trade (as well as on trade with the Rest of the World) and unilaterally moving the UK to globally least-restrictive standards for services and foreign direct investment.

The modelling suggests that the cumulative effects of a No Deal Brexit would see the UK’s real GDP growing overall but with the economy 2.2% smaller in real terms by 2030 than would have otherwise been the case. Unilateral liberalisation would see the UK recover up to 1.7% of that reduction in real GDP over the same period, with the net effect leaving UK real GDP 0.5% lower in 2030 than would have otherwise been the case.

Our study does not consider the one-time costs faced by government and business of adjusting to Brexit, nor does the model capture the sector-specific impact on deeply integrated UK-EU supply chains, such as on the automotive sector, which is likely to be negative. At the same time, these figures do not account for the cessation of the UK’s net fiscal contribution to the EU budget, which would have a positive effect on UK GDP.

The size of these Brexit impacts is small compared to other long-term economic factors that are likely to drive future UK growth. For example, a June 2017 PwC study estimated that UK GDP could be 10.3% higher by 2030 as a result of advances in Artificial Intelligence.

In summary, we can see no relationship between the cold numbers of our economic analysis, which are in line with other comparable studies, and the rhetoric of those who argue that Brexit will make a dramatic difference to Britain’s growth trajectory in either a negative or positive direction. Leaving on WTO terms is not Open Europe’s preferred option but in narrowly economic terms it would not, according to this model, be an unreasonable path for the UK to take, if a negotiated exit was unavailable.

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