May 20, 2016

Will Brexit impact the UK economy?

What Brexit would mean for the UK economy is extremely hard to predict. There are all sorts of stories, predictions and pieces of research flying around, some of them contradicting each other. Those in favour of Brexit largely say it would be good for the UK economy to be outside of the EU. And then, predictably, those who oppose Brexit largely say it would be bad for the UK economy. The truth is that nobody really knows exactly what the outcome will be, should the vote be a Brexit one. They can only predict what they think is likely to happen or may happen.

Let’s start with why those in favour of Brexit think it will be good for the UK economy. There are four key areas of EU membership that critics do not like and claim would be improved by being outside the EU. They are:

– That EU legislation mires UK organisations in red tape, hindering growth and increasing costs. Detractors of EU membership claim that Brexit would lead to improved UK output because the burden of regulation on UK businesses would be reduced. They also say the UK would be able to sign more free trade agreements with countries outside Europe.
– As an EU member, the UK has to pay money into the EU’s coffers. If it leaves the EU, the UK would win back its net contribution to the EU’s budget, which the Treasury has estimated would be 0.5% of GDP per year between 2014 and 2020.
– The EU does little to open markets on the continent, with the result that UK exporters enjoy few benefits. Brexit campaigners say that as a result, leaving the EU would barely impact on UK-EU trade.
– EU immigrants coming to the UK take jobs that British people could be filling. Plus, the British taxpayer has to subsidise public services and provide welfare benefits for these immigrants.

However, according to research by the Centre for Economic Performance (CEP), leaving the EU will hurt the British economy, both in the short and long term. Its report, ‘Should we stay or should we go’, claims that reduced integration with EU countries will cost a lot more than will be gained from not contributing to the EU budget. Worst case scenario, it could result in a recession that would be “comparable to the decline in UK GDP during the global financial crisis of 2008-2009”.

CEP says foreign direct investment in the UK could be harmed and significantly reduced, plus there would be negative consequences as a result reduced trade and reduced skilled immigration.

A recent article on the Financial Times correlates with CEP’s research. The first in a series where the FT considers the economic implications of Brexit, the article predicts an immediate turbulence in financial markets, followed by a prolonged period of uncertainty. The FT says it would be hard for businesses to plan investments or embark on recruitment drives and that the uncertainty and loss of confidence could tip the economy into recession.

The FT also claims that should Brexit be a reality, the UK would not enjoy better, more lucrative trading deals with either the EU or other markets than those it already has by being in the UK.

Those are the short term predictions. What are the long term predictions? The FT article ends by saying that the Treasury’s estimate that the UK’s GDP would suffer a 6% fall by 2030 is highly likely.

There is little that HR can do to prepare for Brexit on the economic front, but it is best to be aware of the potential implications and outcomes.