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Brexit Economic Forecasts
08 Feb, 2018

Many studies show or forecast the economic hit from Brexit

A leaked Government study shows that Brexit would reduce the UK's GDP from what it would have been if we stayed (NB not from now).  Leavers claim that must be wrong. But our correspondent shows that the study's forecasts point to broadly the same conclusion as most other forecasts. Here is a list of economic studies that set out the costs of the referendum vote or that forecast what would happen if Brexit took place:

[1 - 10] Financial Times

In a Big Read article published on 18 December 2017 and entitled The real price of Brexit begins to emerge, the Financial Times brings together the work of ten separate studies:

[1] Office for Budget Responsibility

… a range of estimates calculated by the Financial Times suggesting that the value of Britain’s output is now around 0.9 per cent lower than was possible if the country had voted to stay in the EU. That equates to almost exactly £350m a week lost to the British economy — an irony that will not be lost on those who may have backed Leave because of the claim made on the side of the bus.

[2] King’s College London

…The conclusion that Brexit has already reduced UK growth by 1% or slightly less seems clear.

… Net migration to the UK from the EU fell by 40 per cent in the first 12 months after the vote. Professor Portes [King’s College London] last year predicted an ultimate decline of between 50 and 85 per cent on net migration levels before the referendum. “Arithmetically, this reduction [of 40 per cent] of net EU migration translates into a reduction in growth of 0.1 to 0.2 per cent,” he says.

[3] International Monetary Fund

Britain as a “notable exception” to an improving global economic outlook

[4] OECD

…the pound falling about 10 per cent following the June 2016 result, inflation has risen

…pushing overall inflation up from 0.4 per cent at the time of the referendum to 3.1 per cent

[5] LSE

… study estimates that the Brexit vote directly increased inflation by 1.7 percentage points of the 2.7 percentage-point rise in the 12 months after the referendum. And with wage inflation stuck at just over 2 per cent, “the increase in inflation caused by the Leave vote has already hurt UK households”, Mr Sampson says. He calculates that “the Brexit vote has cost the average worker almost one week’s wages”, but adds the figure could be higher or lower if a complete evaluation of the economic impact was applied rather than just the initial squeeze on incomes from leaving the EU.

… Business investment grew at an annual rate of 1.3 per cent in the third quarter, compared with a March 2016 official forecast for annual growth of 6.1 per cent for the whole of 2017.

[6] LSE (re sterling depreciation)

London School of Economics have examined the direct effect of sterling’s depreciation since the EU referendum on prices and living standards. With the pound falling about 10 per cent following the June 2016 result, inflation has risen more in Britain than in other advanced economies.

… pushing overall inflation up from 0.4 per cent at the time of the referendum to 3.1 per cent last month [November 2017].

[7] National Institute of Economic and Social Research

The results vary according to the comparisons made, but all show the UK economy has been damaged even before it formally leaves the EU on March 29 2019.

The hit to the economy on this comparison is between 0.6 per cent and 1.2 per cent of national income.

… suggesting Brexit has already removed 1.3 per cent from GDP since the vote.

[8] Bonn University

… Estimates using pre-referendum forecasts provide a range within almost the exact same boundaries — between 0.6 per cent of GDP and 1.1 per cent.

Overall, 14 different counterfactuals estimated by the FT and others give a range of a hit between 0.6 per cent of national income and 1.3 per cent, with an average of 0.9 per cent. With national income of £2tn in the year ending in the third quarter of 2017, it means the UK is likely to be producing £18bn less a year than would have been reasonable to expect and this is directly attributable to Britain’s decision to leave the EU. That is just short of £350m a week.

[9] Institute of Economic Affairs

… there will be a short-term hit and it is unarguable that the economy is weaker than it would have been, I would say between 0.5 and 1 per cent weaker.

[10] Institute for Fiscal Studies

… says that “for every 1 per cent of GDP you lose, that’s getting on for £10bn a year of foregone tax revenues”. If 0.9 per cent of GDP has been lost over the five quarters for which data exists, there has already been a £9bn hit to the public finances. So even before the UK has left the EU, the referendum result is costing the UK government more than can possibly be recovered by ending net contributions to Brussels. Inflation has risen more in Britain than in other advanced economies since the Brexit vote rising from 0.4 per cent at the time of the referendum to 3.1 per cent in November 2017.

 

[11] LSE Economists

Patrick Minford's group ‘Economists for Brexit’ is one of the few economic analyst teams to forecast a positive outcome from Brexit. Their forecast of income gains from Brexit contrasts with all other economic analysis, write Thomas Sampson, Swati Dhingra, Gianmarco Ottaviano and John Van Reenen of the LSE in an article published May 27th, 2016. Core to the difference is that Minford ignores distance in trade - what economists call "gravity". 

… analysis from the Bank of England to the OECD to academia has all concluded that Brexit would make us economically worse off.

… if the UK trades under World Trade Organisation rules following Brexit, but maintains import tariffs, income per person falls by 2.6% per cent. Under the ‘Britain Alone’ scenario of unilateral liberalisation after Brexit, UK real incomes still fall by 2.3% per cent. In other words, there is a gain of only 0.3% percentage points from eliminating tariffs compared to just trading under WTO rules, and the British people are still considerably worse off as a result of Brexit.

… The mystery is why Minford can generate effects thirteen times as large.

… using data that is 14 years out of date,

… He ends up comparing apples with a bunch of Boris Johnson shaped bananas across countries

… But to take the position that since no econometric work can be perfect, all inconvenient facts should be ignored is poor scholarship which leads to bad policy advice.

 

[12 – see No. 10] Institute for Fiscal Studies

The IFS found on 23 November 2017 that the UK faces two decades of no earnings growth and more austerity

The Institute for Fiscal Studies said in its traditional post-budget analysis that forecasts slashing productivity, earnings and growth in every year until 2022 made “pretty grim reading”, and predicted that even by the middle of the next decade, Britain’s public finances would still be in the red.

In its analysis of the budget and the report from the independent Office for Budget Responsibility, the IFS said:

  • GDP per person will be 3.5% smaller in 2021 than forecast in March 2016. The loss of growth will mean the economy is £65bn smaller in 2021 than previously thought.
  • Average earnings are on course to be £1,400 a year lower in 2021 than forecast in 2016. That means the recovery in wages will have failed to materialise and average earnings will be below their 2008 level adjusted for inflation.
  • Borrowing will be £12bn higher in 2021 than was forecast in March.
  • Despite a spending increase over the next five years, the NHS is facing its tightest funding constraints since the 1980s. Annual spending growth of 4% a year after inflation before the financial crisis has fallen to 1% a year at a time when the NHS is being stretched by an expanding and ageing population.

Paul Johnson, the IFS director, said the OBR’s decision to reduce its growth forecasts by one-quarter over the next five years would delay deficit reduction, limit Hammond’s ability to ease pressure on welfare and public services and harm living standards.

“We are in danger of losing not just one but getting on for two decades of earnings growth,” he said. “We will all have to get used to the idea that steadily rising living standards may be a thing of the increasingly distant past.”

The nascent recovery in earnings, which were growing through 2014 to the first half of 2016, had been choked off, Johnson said. “That they might still be below their 2008 level in 2022, as the OBR forecasts, is truly astonishing. Let’s hope this forecast turns out to be too pessimistic,” he added.

 

[13] The Budget

On 4 January 2018, Tony Blair's Institute published a useful compilation of information that has come to light since the referendum under the title Brexit - What We Now Know

"… the Budget prediction that, due to Brexit, economic growth is going to be below expectation not just this year but averaging 1.5% for the next 5 years in a row. This has not happened for over 30 years. This is in addition to the fall in our currency, fall in living standards and now the first falls in employment."

In a separate article, Tony Blair draws out the implications and the options

 

[14]   British Retail Consortium

In a blog post dated 20 December 2017, the BRC boss Helen Dickinson talks about the effect that post-Brexit tariffs would have, absent an agreement to remove them. 

The weighted average tariff of all food imported by retailers from the EU would be 22 per cent, with some tariffs as high as 44 per cent for cheese and 40 per cent for beef.

… so it is more than clear that new tariffs will only put upward pressure on prices. Based on import and sales data gathered from BRC members and tariff rate data from the International Trade Centre, we calculate that, for instance, the price of beef would increase from 5 to 29 per cent; cheddar would increase by 6 to 32 per cent; tomatoes by 9 to 18 per cent; and broccoli from 5 to 10 per cent.

 

[15] PwC Brexit Factbase 

In their October 2017 update, PwC management consultants Richard Barfield and David Corless write about the economic outlook: 

The economic outlook for 2017 and 2018 has been improving for most countries, but not the UK.

In October 2017, the IMF singled out Britain as a "notable exception" to an improving global economic outlook, as it confirmed a cut to its long-term forecast for UK growth and said negative effects of Brexit were beginning to show.

IMF reduced its UK long-term growth outlook from an estimated annual growth rate of 1.9% to 1.7%.