Predictions about the economic impact of a no-deal Brexit have ranged from the apocalyptic to “no big deal.” Indeed, some fringe economists have even suggested that no deal would boost the UK economy. And while no credible analysis supports this view, there is huge uncertainty – particularly in the short term.

But that doesn’t mean that economics has nothing useful to say, or that there isn’t consensus among credible economists about the likely consequences. As our report on the impacts and implications of no deal shows, the imposition of tariff and non-tariff barriers between the UK and its largest trading partner will be a major shock to the UK economy.

We can also identify the sectors – the car industry, pharmaceuticals, chemicals, food from agriculture, and so on – that are likely to be most affected, although we can’t predict just how serious any additional disruption and delays at key ports will be. 

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Beyond that, the fall in the pound – most if not all of which will be priced in well before 31 October – will push up inflation and, as after the referendum, reduce real wages. We can also be reasonably certain that some things won’t happen – the financial system won’t collapse, the stock market won’t crash, and interest rates won’t skyrocket. And policy can, and in all likelihood will, respond – the government will probably increase spending and perhaps cut taxes, while the Bank of England will, if necessary, cut rates.

But the big question in the short term is what happens to business and consumer confidence – Keynes’ famous “animal spirits.” Pre-referendum forecasts assumed that a Leave vote would mean a big and lasting hit, depressing consumer spending and business investment. In fact, when it became clear nothing much would change in the short term, confidence quickly recovered. If Brexit – indeed, the hardest possible Brexit – becomes a reality, will this time be different?

That is likely to depend on just how severe the immediate disruption to trade is, but also on political developments and public perceptions. There are no economists, or anyone else, who can reliably forecast these. 

So the bottom line is that the immediate impact of no deal will be a major economic shock. A recession is very much a possibility – but its depth and severity are uncertain.

The UK economy will, however, eventually adjust, one way or the other, to the new realities of life outside the EU. And here there is greater certainty about the economic impact of Brexit. At the most basic level, leaving the EU will make the UK poorer because it will make it harder for UK firms and consumers to do business with European countries, as well as reducing labour mobility between the UK and the EU. 

And leaving the EU with a no-deal Brexit will be more costly than doing so with a deal which allows us to stay in the EU’s customs union or single market. These costs won’t just fall on the UK – the EU will also lose from Brexit, but the costs will be much smaller relative to the size of its economy because we are far more dependent on trade with the EU27 than vice versa.  

Our earlier research analysed the long-run effects of trading with the EU on World Trade Organisation (WTO) terms. We found that, after 10 years, a WTO Brexit would reduce the UK’s income per capita by between 3.5 per cent and 8.7 per cent. The government’s own modelling exercise produced similar results.

Forecasts are uncertain – and here, in addition to the normal uncertainties inherent in long-term economic modelling, there are additional ones about future policy. 

For example, both the UK and US governments have signalled their intentions to negotiate a speedy trade deal. But – even leaving aside the political difficulties – it is likely that any benefits will be relatively small. The EU accounts for around half of UK trade, more than three times as much as the US. And standard free trade agreements do less to reduce trade barriers than the deep integration that is the hallmark of the EU single market. 

The government’s own analysis said that, even on optimistic assumptions about the number of deals that could be concluded over the next decade, the impact would be very small: overall, new trade deals could boost GDP by between 0.2 per cent and 0.7 per cent of GDP in the long term.

Other policy changes to mitigate the negative impacts are also possible. Theresa May’s departure opens the way for a more liberal immigration policy than that suggested in the Immigration White Paper, which could boost economic performance; although the new home secretary, Priti Patel, has signalled her intention to pursue a relatively restrictive policy, which would have the opposite effect.

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Our research suggested that the White Paper proposals would reduce GDP by up to 1.8 per cent over 10 years. And it is conceivable that Brexit – and in particular the economic impact of a no-deal Brexit – might provide the impetus for government to address some of the longer-term issues, such as the lack of public investment in infrastructure and poor provision of training and skills, that have contributed to the UK’s poor productivity performance.

However, overall, there is little doubt that, whatever else may happen over the next decade, a no-deal Brexit will be a persistent drag on the UK’s economic growth for years to come.

Jonathan Portes is a senior fellow at The UK in a Changing Europe and Professor of economics and public policy at Kings College London. You can read the full report ‘No Deal Brexit: issues, impacts and implications’ here

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