Under any scenario, the UK’s exit from the European Union will leave the country worse off. Free trade deal or not. Cuts to migration or not. Trade barriers or not. Every way you look at it, Brexit will make the the economy smaller compared with remaining in the bloc. That’s the assessment of both the UK Treasury and the Bank of England in separate assessments released today.
As British prime minister Theresa May tries to get the public and her parliamentary colleagues behind her plan for Brexit, these assessments show that there is a stark and unavoidable economic cost to the UK’s divorce from its biggest trading partner.
On Sunday (Nov. 25), the UK and EU signed off on a 900-plus page withdrawal agreement and a political declaration on future ties after Brexit. May said this deal “delivers on the vote” by ending the free movement of people between the UK and EU, slashing payments to Brussels, and mostly taking the UK out from under jurisdiction of the European Court of Justice. These commitments also mean the UK will be out of the EU’s single market and customs union. The government is banking on the supposed political benefits of the deal outweighing the economic costs.
May’s deal is now being scrutinized before the British parliament votes on it on Dec. 11. Both the Treasury and Bank of England are keen to stress their reports are not economic forecasts, but possible scenarios based on changes to trade and migration, all else being equal, after Brexit becomes official in March next year. The results aren’t pretty.
The Treasury’s assessment
Under May’s plan, the size of the UK economy would be 3.9% smaller after 15 years, compared with staying in the EU, assuming some trade frictions and net zero inflow of EU migrants, according to an analysis by the UK Treasury.
The worst-case scenario, leaving the EU without a deal that would relegate the UK to trading on WTO rules, could lead to a 9.3% hit to the economy.
The Treasury also assess other options: a standard free-trade agreement (FTA) with the EU that cuts tariffs but has other costs such as regulatory barriers, and a Norway-style agreement which keeps the free movement of people, access to the single market, and requires the UK to follow EU rules. It also considers May’s deal with and without trade frictions. (There’s no firm agreement that ensures frictionless trade with the EU in the future.) The scenarios are also assessed against no change to migration rules and with net zero EU migrants. Under every scenario, the UK is worse off. On its own, reducing the net inflow of EU migrants to zero would slash 1.8% from GDP, the Treasury said.
Even the most optimistic aspects of this assessment are bleak. They are modeled on the expectation that the UK will be able to agree ambitious trade deals with other countries, which is not allowed as long as the UK remains an EU member. The chances of this have already been disputed and Donald Trump added this week that May’s deal might hinder the prospects of a trade deal between the US and UK. Nevertheless, the Treasury only expects new trade deals—the shining promise of the pro-Brexit camp—to boost the economy by 0.1%.
The Bank of England’s assessment
When compared to the economic path the UK was on before the Brexit referendum in June 2016, leaving the EU will categorically make the UK worse off, according to the central bank’s assessment. Under May’s deal, GDP would be between 1.25% and 3.75% lower by the end of 2023, a shorter time horizon than the Treasury’s report.
In what the central bank considers the worst-case scenario—no future trade deal with the EU, no transition period at the end of March 2019, and a loss of trade agreements with non-EU countries—GDP would fall by more than 10%. The Bank of England foresees a worse economic shock than the one the UK experienced during the financial crisis, with house prices falling twice as steeply. Meanwhile, the unemployment would rise to 7.5% (from around 4% today), and the pound would plummet 25% against the dollar, falling below parity.
The most optimistic outcome, in which the UK and EU have a “close” economic partnership with a comprehensive trade arrangement for goods and some trade in business and financial services, would boost UK GDP by 1.75% by the end of 2023, compared to the current trend of economic growth. That said, this is still below where the UK economy would have headed without Brexit.
The damage already done
When the UK voted to leave the EU, many feared a severe and immediate economic hit. The Bank of England suffered a loss of credibility for predicting a recession that never materialized (possibly because it’s own monetary policy actions stopped it). However, there has already been an economic cost to the vote.
The UK’s pace of economic growth is now among the slowest in the G7, estimated to be 2% lower than if the Brexit vote had gone the other way. Household incomes have barely grown since the referendum. This is on top of nearly a decade of austerity that has inflicted “unnecessary misery” and a decade of lost wage growth. A recent report by the UN’s International Labour Organization found that wage growth in the UK was the worst in the G20: along with Italy, Britain was the only country to experience a decline in real wage growth over the past 10 years (pdf).
Others have weighed in on how the UK economy might fare under May’s Brexit deal. The National Institute of Economic and Social Research said May’s deal would leave the UK economy about 4% smaller than staying in the bloc, an economic loss that’s worth around £1,090 per year to each person in the UK.
According to the research group The UK in a Changing Europe (pdf), made up of economists from leading British institutions, May’s Brexit deal could reduce GDP per capita by between 1.9% and 5.5% in 10 years’ time, compared to remaining in the EU. In the long-term—ignoring the likely short-term disruption—a “no deal” Brexit would cut GDP per capita by 3.5% to 8.7%.
Even as the British government presents May’s deal as the best of all options, it’s unlikely, at the moment, that it will pass the vote in parliament next month. If it’s rejected, it’s hard to say what will happen next. Mostly likely, May will try and make some amendments to the political declaration on the future ties between the UK and EU and put the deal forward for a vote again. But other politicians are pushing for either a general election or even a second referendum.
Today’s economic assessments, while bleak, might not alter this course of events very much. After all, Brexit is mostly a political project and the economic impact has failed to resonate from the start. Staunch supporters of Brexit want to deliver a clean break from the EU, regardless of the economic cost.