Bank warns hard Brexit would bring a bleak economic future
Research by Rabobank also shows that any form of Brexit – hard, soft or through a new free trade agreement (FTA) – would be detrimental, potentially costing the economy £400 billion and wiping 18 per cent off GDP growth by 2030.
Under a “no deal” scenario, British workers would be left £11,500 worse off, while an FTA or soft Brexit would see working Britons stomach a £9,500 or £7,500 blow respectively.
Prime Minister Theresa May said earlier this week her government was putting in place plans for no deal, and the research comes after Chancellor Philip Hammond warned of a Brexit “cloud of uncertainty” hanging over the economy.
To compound matters, the UK was also singled out on Tuesday by the International Monetary Fund (IMF) as the only major economy not to see its growth forecast upgraded. Hugo Erken, senior economist at Rabobank, said: “There has been extensive economic research into the immediate effects of Brexit, but they have largely focused on trade and investment, whereas implications of the different factors that affect productivity is only marginally or partially addressed.
“By looking at dynamics such as innovation, competition, knowledge and human capital, how they will change and what effects this will have on the structural make-up of the UK and European economy, our research shows that the long-lasting impact of Brexit is likely to be more severe than initially anticipated.”
Rabobank said that even if the UK negotiated a new free trade agreement, like Switzerland’s, it would cost Britain 12.5 per cent of GDP growth by 2030.
A soft Brexit, where the UK remains part of the European internal market but exits the customs union, would result in a 10 per cent hit.
According to the research, a hard Brexit implemented in 2019 without a transition period would result in the UK economy “immediately falling into a two-year recession period”. A £400 billion hit would be equal to £11,500 per British worker.
Hard Brexit would cause a jump in unemployment from 4.6 per cent in 2018 to 6.2 per cent in 2020, but this would only be temporary and quickly return to “long-term structural unemployment levels”.
For the FTA and the soft Brexit scenario there would also be a recession, Rabobank said, but “milder and much more short-lived”.
If negotiations in Brussels result in a hard Brexit, UK GDP is expected to decline by 2.4 per cent following its departure in 2019.
However, if the UK and EU were to agree on a free trade agreement, GDP would still fall but only by 1.1 per cent, and by just 0.3 per cent in a soft Brexit scenario.
For countries in the euro area, any form of Brexit would see a 2 per cent hit to EU GDP by 2024, the study said, with the Netherlands bearing the brunt because of its closer trade relationship with the UK, accruing losses of around €25-35bn.
Rabobank’s study used macro-econometric modelling to assess the effects of the UK leaving the EU and all three scenarios were benchmarked against a situation where the UK would continue to be a member.
A government spokesman said: “We are committed to securing a new economic relationship with the EU that can deliver prosperity for people across our country. To lock in strong future growth, we are investing £23bn in infrastructure, research and housing alongside an ambitious industrial strategy.”
The report is published the day after Chancellor Philip Hammond indicated he is ready to spend large sums to get Britain ready for a “no deal” Brexit, as it emerged that £250 million has already been allocated for EU withdrawal preparations.
The Chancellor said there was a “need for speed” from the other 27 EU nations in agreeing a transition to the post-Brexit era, both to deliver certainty for businesses and to avoid wasteful government spending on contingency planning.
Delays in beginning talks on the future UK/EU trading relationship – caused by Brussels’ insistence that the divorce deal must be settled first – were creating a “cloud of uncertainty” which was acting as a damper on the UK economy, he said. Mr Hammond used an article to say that he was not yet ready to turn on the tap for spending on infrastructure, like lorry parks at Channel ports, which may be needed if the UK and EU fail to reach an agreement by the official Brexit date of March 2019.
Spending money now on Brexit preparations would divert cash away from priorities like the NHS, social care and education, and the investment may turn out to be unnecessary if talks in Brussels result in a good deal, he said.
But he later told MPs that the Treasury was “prepared to spend when we need to spend” on contingency plans for “no deal” outcomes including a possible “bad-tempered breakdown” in negotiations.
The government would need to decide at some point what was the “realistic” worst case it needed to plan for, but it would wait until the “last point” before committing funds, he said.
It was “theoretically conceivable” that planes could be grounded at UK airports on day one of Brexit, though nobody “seriously believes that that is where we will get to”, he told the Commons Treasury committee.