Reports on the impact of different Brexit scenarios dominated the headlines in the first few days of the week.
- The first detailed economic analysis of Theresa May’s deal was released on Monday. It stated that the long-term annual costs of the deal were likely to range between £700 and £1100 per annum. The report, written by the National Institute of Economic and Social Research and commissioned by the People’s Vote campaign, examined two scenarios: a Canada-style free-trade agreement with the EU; and the UK remaining in a customs union with the EU. It concluded that the former would cost UK citizens around £1100 each per annum, and the latter around £700. The total economic cost of the deal was estimated at £100bn over ten years – roughly the annual output of Wales.
- Research produced jointly by the LSE, King’s College, and the IFS suggested that May’s deal could leave the economy as much as 5.5% smaller in ten years’ time. The report focused on what would happen in the “backstop” scenario, i.e. where the UK remained as part of the customs union but left the single market. The anticipated impact is between 1.9% – 5.5% of GDP, with the range mirroring the “substantial uncertainties involved”. A hit of 5.5% is equivalent to £2000 per person. The counterpart prediction for a no-deal outcome is 3.5% – 8.7%.
- The government’s analysis stated unequivocally that the UK would be worse off under all possible Brexit scenarios. The report claims that a no-deal Brexit could leave GDP 10.7% lower in fifteen years’ time than it would be if were we to remain in the EU. The same figure for a Chequers-style deal is 2.1%, but the report didn’t actually include a model of May’s deal. John McDonnell commented that “the deal on the table is worse than the abandoned Chequers deal.”
- The Bank of England published its assessment of the different possible Brexit outcomes on Wednesday. It warned that a no-deal Brexit could condemn the UK economy to a worse recession than the financial crisis of 2007-8. The report considered three scenarios: a “disruptive” Brexit in which the UK retained access to some trade agreements; a “close” trading relationship with no customs checks, no regulatory barriers, and a partial deal agreed on financial services; and a “less close” trading relationship where customs checks start after 2021 and other regulatory checks are put in place. (Jill Treanor, BBC.) In the case of a disorderly Brexit and the absence of a transition period, the UK economy would shrink by 8% in 2019, unemployment would rise to 7.5%, and interest rates would hit 4%. The property market would be drastically affected, with house prices falling by a third and commercial property by 48%. A close relationship would leave the economy 1% smaller than it would be within the EU, and a less close relationship could see growth reduced by 3.75%.
Carney warned on Thursday that a no-deal Brexit could spell disaster for many companies across the UK. He cautioned that “less than half of the businesses in the country have initiated their contingency plans for a no-deal Brexit.” More strikingly, the Federation of Small Businesses estimated that only one in seven small businesses were making plans for a no-deal Brexit. With the economy expected to convulse throughout the UK in any leave scenario, the FSB released a report urging the government to ensure support for small businesses in the UK’s most economically disadvantaged regions, where firms tend to have significantly lower turnover. FSB Scotland called on the Scottish Finance Secretary to put aside a £75 million resilience fund to help small businesses adapt after Brexit.
Meanwhile, attempts to avoid the calamitous effects of a no-deal and no-transition scenario are seeing capital leave the UK on a frightening scale. London will lose up to £700bn of assets to Frankfurt by March 2019, according to the MD of Frankfurt Main Finance, as banks prepare for the worst. Over 1,800 City jobs have already been confirmed as having shifted to the EU since June 2016, and this week brought word that Goldman could move up to 700 in the case of a no-deal Brexit. Beyond the walls of the City, software company Scisys has left for Dublin, making it the first company to flee for Irish shores. As uncertainty grows before the parliamentary vote – and in the wake of the likely rejection of May’s deal – we should brace ourselves for more of the same.
Sterling had another wobbly week. Tuesday brought a heavy hangover after Donald Trump added to the already-toxic spirit of Brexit uncertainty. It dropped after The Donald branded May’s agreement a “great deal for the EU”, falling to below $1.28 on Tuesday. A spike on Thursday precipitated another fall, but it then levelled off at $1.28 – representing a drop of almost 3% in the last three weeks . With May’s deal unlikely to pass through parliament, sterling isn’t going to find its sea legs any time soon; ongoing volatility seems certain.
Business concern about the impact of the government’s post-Brexit immigration plans continued to grow. A leaked draft of the government’s immigration white paper includes a proposal for an 11-month restricted visa aimed at ensuring a continued supply of labour to sectors reliant on immigrants who are paid less than the threshold of £30,000. On Tuesday, Arup warned that the plans amounted to a double-edged sword that would serve both to complicate arrangements for employers and to sustain the concern of those UK citizens who feel most worried by immigration. A survey by the Confederation of British Industry (CBI) that was released on Friday found that nine in ten businesses believe Brexit has negatively impacted on their ability to recruit staff this year, and on Sunday The Guardian quoted the CBI’s director-general, Carolyn Fairburn, as saying that the severe limits imposed on low-skilled immigration risks inflicting “massive damage” to livelihoods and communities.
One of the week’s bigger political stories came when Sam Gyimah (Minister for Universities, Science, Research, and Innovation) resigned shortly after Theresa May announced that the UK would walk away from the military aspect of the European Galileo satellite navigation system. It’s looking increasingly likely that the government will never recover the £1.2bn it invested in Galileo. Mr. Gyimah, who was responsible for space technology and who resigned in protest at the move, later said that a second referendum might be “the most sensible path for both leavers and remainers.”
As Christmas approaches, we can expect plenty of analysis of consumer certainty and spending. Brexit uncertainty continues to affect consumer certainty, and that should represent a grave cause of concern for those businesses whose health relies on a deluge of December spending.
This is not a full summary of the week’s reporting on the economic impact of Brexit. For comprehensive coverage, please scroll through our homepage.