Economic Effects Of Brexit

Economists expect that Brexit might have notable immediate and longer-term effects on the economies of the UK and at least part of the 27 other EU member states. In particular, there is a broad consensus among the economists and in the economic literature that Brexit might likely reduce the UK's economic growth in the medium and long term, and that the Brexit referendum itself might damage the economy. Studies on effects since the referendum is also indicating a negative momentum in GDP, trade and investment, as well as household losses from increased inflation.

Immediate Effect

Short-term macroeconomic forecasts by the Bank of England and other banks of what would happen immediately after the Brexit referendum are too pessimistic. The assessments assumed that the referendum results would create greater uncertainty in markets and reduce consumer confidence particularly by a negative signaling effect. According to one study, the referendum result had pushed up UK inflation by percentage points in 2017, leading to an annual cost of £404 for the average British household. In this respect, it is also estimated that the economic costs of the Brexit vote were approximately 2.1% of GDP. According to Financial Times, the Brexit referendum results has reduced national British income by between 0.6% and 1.3%. A 2018 analysis by Stanford University and Nottingham University economists estimated that uncertainty around Brexit has reduced investment by businesses by approximately 6 percentage points and caused an employment reduction by 1.5 percentage points. A number of studies identified that Brexit-induced uncertainty about the UK's future trade policy and also reduced British international trade since June 2016 onwards. Further, a recent 2019 analysis found that British firms substantially increased offshoring to the European Union after the Brexit referendum, whereas European firms reduced new investments in the UK.

Medium & Long-term Effect

There is overwhelming or near-unanimous agreement among economists that leaving the EU might adversely affect the British economy in the medium- and long-term. Surveys of economists in 2016 showed overwhelming agreement that Brexit would likely to reduce the UK's real per-capita income level. In addition, 2018 and 2017 surveys of existing academic research found that the credible estimates ranged between GDP losses of 1.2–4.5% for the UK, and a cost of between 1–10% of the UK's income per capita. These estimates differ depending on whether the UK exits the EU with a hard or soft Brexit. In January 2018, the UK government's own Brexit analysis was leaked, which showed that UK economic growth would be stunted by 2–8% for at least 15 years following Brexit, depending on the leave scenario. According to most economists, EU membership has a strong positive effect on trade and as a result the UK's trade would be worse off if it leaves the EU. According to a study conducted by University of Cambridge economists, under a "hard Brexit" whereby the UK reverts to WTO rules, one-third of UK exports to the EU would be tariff-free, one-quarter would face high trade barriers and other exports risk tariffs in the range of 1–10%. A 2017 study found that almost all UK regions are systematically more vulnerable to Brexit than regions in any other country. In addition, the same study examining the economic impact of Brexit-induced reductions in migration recommended that there would likely be a significant negative impact on UK GDP per capita, with marginal positive impacts on wages in the low-skill service sector. Nonetheless, it is unclear how changes in trade and foreign investment might interact with immigration, but these changes are likely to be important for global economy. Further, with Brexit, the EU would lose its second-largest economy in terms of financial capital of the world, the country with the third-largest population. We estimate that the EU would lose its second-largest net contributor to the EU budget 2015 (Germany €14.3 billion, UK €11.5 billion, France €5.5 billion). Thus, the departure of Britain would result in an additional financial burden for the remaining net contributors, unless the budget is reduced accordingly. Germany, for example, would have to pay an additional €4.5 billion for 2019. Again for 2020, UK would no longer be a shareholder in the European Investment Bank, in which only EU members can participate. Britain's share amounts to 16%, €39.2 billion, which Britain would withdraw unless there is an EU treaty change. All the remaining EU members (as well as Switzerland, Norway and Iceland) might also likely experience adverse effects (albeit smaller effects than the UK), in particular Ireland, the Netherlands and Belgium. Let us now discuss in detail about the issue:

Trade within Europe

Post-Brexit outcomes which reduce trade or increase the cost of trade between the UK and the rest of Europe might be damaging for both sides. The EU is a more important trade partner for the UK than the UK is for the EU. Hence UK demand is very important in macro terms for many EU countries. To note that UK right now runs large bilateral deficits against several member states.

Foreign Direct Investment

The UK is the largest recipient of FDI in the EU. Brexit could reduce the attractiveness of the UK as a gateway to Europe. It could also lead to a reduction in investment from the rest of the EU, which is the biggest source of FDI in the UK. It may become harder to attract corporate HQs. The EU was the source of around 46% of the stock of FDI in the UK in 2013. This dependence has started to fall somewhat in recent years, with the EU share down from 53% in 2009. The UK has many advantages that would be unaffected by Brexit such as language, light regulation and deep capital markets. Even so, the UK may struggle to attract as much new investment following Brexit. Other locations inside the EU are likely to be more attractive for marginal investment decisions.

Liberalization and Regulation

The UK has championed the single market, but outside the EU would no longer be an effective advocate of further liberalization. UK critics often complain about EU regulatory excesses, but many regulations are intended to create the level playing field the single market requires. A paradox of UK Euroscepticism is that following Brexit the UK would lose influence over EU regulation without gaining much freedom to regulate independently.

Industrial Policy

UK industry benefits from research collaboration in Europe and researchers have done well in EU competitions. While the UK would gain flexibility over industrial policy outside the EU, it would lose the benefits from scale and influence over policy in areas such as energy.

Immigration

Immigration is a troubled political issue in the UK both because the costs and benefits are not distributed evenly and as perceptions have become disconnected with reality. This could be partly due to the hostile media coverage. The scope to tighten immigration depends on the Brexit model. This risk is damaging competitiveness, particularly of London, and being economically costly.

Financial Services

Established advantages and agglomeration effects mean the UK has a strong competitive edge that would be hard to dislodge. However, existing EU regulations would make it harder for London to serve European markets, particularly for retail products and in euro trading. Financial inclusion might be jeopardized and business could decline.

Trade Policy

The UK would be free to set its own trade policy priorities under some Brexit models, but these are unlikely to be much different from the EU's. The UK would have less leverage and be a lower priority trade partner than the EU for the major economies. The UK would lose the strength in numbers at the WTO when settling disputes with countries like China.

International Influence

The UK currently enjoys considerable influence both in and through the EU. This would be diminished if the UK leaves the EU. There are, however, risks to the UK's influence even if the UK stays inside the EU. This is both because of a generational change of staff in key institutions and the risk that the Eurozone assemblies against the UK.

Budget

The direct financial cost of EU membership is relatively easy to quantify. However, the financial benefit from leaving the EU depends on the Brexit model and the outcome of the negotiation between the UK and the rest of the EU. There would be significant variation in the impact across the UK, with some parts gaining, while others lose.

Uncertainty

Brexit would be a protracted process, lasting around ten years. The endpoint for the UK-EU relationship would be subject to a negotiation. Business would face high and increasing levels of uncertainty during this process, impacting on investment decisions and with macroeconomic consequences. The referendum could be held in 2016 or 2017 following a renegotiation of the terms of the UK's membership. The outcome is uncertain because the outcome of the renegotiation is uncertain and plebiscites can often end up being about something else, particularly if the government loses popularity. Based on the existing literature of finance, we find that the highly geared firms will jeopardize the economic growth of the country, make an unstable and quite vulnerable...

Contributions to the EU

Supporters of withdrawal argued that ending net contributions to the EU would allow for tax cuts or government spending increases. According to the study of The Institute for Fiscal Studies, on the basis of Treasury figures, in 2014 the United Kingdom's gross national contribution (ignoring the rebate) was £18.8 billion, about 1% of GDP. Because the UK receives (per capita) less EU spending than other member states. We notice that a rebate was negotiated that contributed £14.4 billion, approximately 0.8% of GDP. If EU spending in Britain is also taken into account, the average net contribution for the next five years is estimated at about £8 billion a year, which is about 0.4% of national income. The Institute for Fiscal Studies argued that the majority of forecasts of the impact of Brexit on the UK economy indicated that the government would have less money to spend even if it no longer had to pay into the EU.

Financial Institutions

We find that the share prices of the five largest British banks fell an average of 21% on the morning after the referendum. Shares in many other non-UK banks also fell by more than 10%. We notice that both HSBC and Standard Chartered had fully recovered, while Lloyds, RBS Group and Barclays remained more than 10% down. All of the Big Three credit rating agencies reacted negatively to the vote: Standard & Poor's cut the UK credit rating from AAA to AA, Fitch Group cut from AA+ to AA, and Moody's cut the UK's outlook to "Negative".

International Monetary Fund

In July 2016, the IMF released a report warning that Brexit' marks the materialization of an important downside risk to global growth. Considering the current uncertainty as to how the UK would leave the EU, there is still very much unfolding, more negative outcomes are a distinct possibility. In September 2018, the IMF stated that Brexit would probably, "Entail costs", but a disorderly leaving could result in, "A significantly worse outcome". In this respect, Lagarde said that any deal might not be as good as the smooth process under which goods, services, people and capital move around between the EU and the UK without impediments and obstacles. Overall, our projections assume a timely agreement with the EU on a broad free-trade pact and a relatively smooth Brexit process after that. A more disruptive departure would have a much worse outcome.