Leaving the European Union without a trade agreement in hand would cost the United Kingdom economy an estimated £400 billion by 2030, according to new research published by Rabobank, the Utrecht, Holland-headquartered food and agribusiness bank.
The study uses macro-econometric modeling to assess the effects of the UK leaving the EU in three possible scenarios: a hard Brexit where negotiations do not lead to a trade agreement; a free trade agreement (FTA), like that of Switzerland; a soft Brexit where the UK remains part of the European internal market but exits the customs union. All three scenarios are benchmarked against a situation where the UK would continue to be a member of the EU (‘Bremain’). This study includes new elements compared to other studies and finds much larger effects.
A hard Brexit would cost the UK 18 per cent of GDP growth by 2030, compared to a situation where the UK would retain its EU membership. This equates to £11,500 per British worker. By comparison, negotiating a new free trade agreement would cost the UK 12.5 percent of GDP growth by 2030, and 10 percent of GDP growth if the country were to undergo a soft Brexit. This equates to £9,500 and £7,500 per British worker respectively.
For countries in the euro area, a UK departure from the European Union, however severe, would result in a cumulative impact on EU GDP of -2 percent by 2024. The economic impact on the Netherlands, which was looked into specifically by the Netherlands-based research team, will be higher than on most other EU member states because it has a much closer trade relation with the UK, accruing losses of around €25 billion and €35 billion.
Immediate Impacts
According to the Rabobank study, a hard Brexit outcome implemented in 2019 without a transition period would result in the UK economy immediately falling into a two year recession period. For the FTA and the soft Brexit scenario there would also be a recession, but milder and much more short-lived.
If negotiations in Brussels result in a hard Brexit, UK GDP is expected to decline by -2.4 percent following its departure in 2019. However, if the UK and EU were to agree on a free trade agreement, a GDP decline of -1.1% would be expected, and a -0.3 percent decline in a soft Brexit scenario.
Fluctuating Trade Activity
With the EU being the UK’s single most important trading partner, any Brexit scenario would result in a slowdown of trade due to higher tariffs and custom controls. In the event of a hard Brexit, export volumes are estimated to be approximately 30 percent lower than if the UK remained in the European Union, 15 per cent lower in a free trade agreement scenario and 10 per cent lower if the UK negotiates a soft Brexit.
Import volumes would also be impacted, with a hard Brexit resulting in a 27 per cent decline in goods and services coming into the UK. The effect would be 23 percent in the event of a free trade agreement and 16 per cent in a soft Brexit scenario.
Labor Market Impact
The research shows an initial rise in unemployment figures, with a hard Brexit causing a jump from 4.6 percent in 2018 to 6.2 percent in 2020, but quickly returning to long term structural unemployment levels. In a Bremain scenario, Rabobank would anticipate unemployment to be stable, hovering at just above 4 percent. In any Brexit scenario, long-term damage to the UK’s labor market is expected to be limited due to its dynamic nature, with the research showing no indication that an exit from the European Union in any form will result in higher structural unemployment levels.
However, the research shows that labor-augmented technological change is anticipated to stall in any Brexit scenario, which implies that technology advances will affect fewer jobs compared to if the UK remains in the European Union.
Hugo Erken, senior economist at Rabobank, commented: “There has been extensive economic research into the immediate effects of Brexit, but they have largely focused on trade and investment, whereas implications of the different factors that affect productivity is only marginally or partially addressed. By looking at dynamics such as innovation, competition, knowledge and human capital, how they will change and what affects this will have on the structural makeup of the UK and European economy, our research shows that the long-lasting impact of Brexit is likely to be more severe than initially anticipated.”
