Knowledge & Insight

Likely economic impact of "Brexit"

Mon 2 May 2016

It’s difficult to pick up a newspaper or switch on the television without coming face-to-face with another story about the fast-approaching referendum on UK membership of the EU. And the claims of both Brexit and Bremain parties couldn’t be more contrasting – according to which you believe, we’re doomed if we stay and doomed if we leave.

In truth, neither side has a complete understanding of what will happen should the UK vote to leave, nor what will happen to the UK economy should we vote to stay. So what DO we know? Well according to a recent paper by PwC, there are likely to be four distinct areas where the impacts of leaving the EU will be felt most.

Trade

The EU is currently the largest market for UK exports, and British firms currently enjoy tariff-free trade with all other EU nations. It is likely, although not certain, that Brexit would result in the raising of tariffs or non-tariff barriers for trade with the EU bloc, and this may also have an impact on foreign direct investment into the UK. However, the UK would then be free to create its own trade agreements with other non-EU countries. And given that the world’s most dynamic economies currently lie outside Europe’s borders, closer integration with vibrant emerging nations may in fact help to re-energise the UK.

Immigration

Workers from other EU states now make up around 6% of the UK’s total workforce, yet a UK exit could lead to restrictions on the flow of labour across national borders. Of course, there are likely to be multiple effects in such a scenario. With a reduced labour supply, wages may be pushed upwards – which at the most basic level would be good for workers, but not so good for employers. Businesses could also be hit by skills shortages, impacting productivity. Yet in the medium- to long-term, workers could benefit from greater investment in training as employers seek to fill the skills gap.

Business regulation

Many entrepreneurs have long complained about the constraints that European red tape has placed on their businesses, and it seems clear that Brexit would lead to a lightening of business regulation. Yet much of the EU legislation has been designed to protect employees’ rights, to protect consumers and to protect the environment. So a lifting of legislation wouldn’t necessarily deliver benefits for all, and it is unclear which sectors and stakeholders would emerge as winners and losers in a changed regulatory landscape.

Conclusions?

PwC have modelled a number of scenarios around UK exit, predicting a fall in GDP by 2030 of between 0.8% and 2.7%. Yet they also state that with lower immigration, there would be less of an impact on GDP per capita. Indeed, some analysts suggest that the crux of the argument lies elsewhere. If the proposed EU free trade agreement with the US (TTIP) is finalised, the UK will yield even more power to external, non-elected bodies. It should also be noted that since the Treaty of Rome was signed in 1957 to formally create the European Economic Community, Europe has so far failed to achieve a free trade agreement with the US. So when considering the US President’s statement about making the UK go to the back of the queue when seeking a trade deal, some might question whether it’s a queue worth joining.

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