The decision to leave the EU: economic consequences for the UK

Transcription

1 The decision to leave the EU: economic consequences for the UK 5 th December 2016 Simon Kirby (NIESR), London and ESRC Centre for Macroeconomics

2 Outline of the talk The outcome of the vote Brexit means Brexit?, Timeline(s) The short-run economic consequences of the decision to leave Our current forecast for the UK economy (published 2 nd November) Policy responses Long-run implications for the UK Task(s) ahead Long-run economic effects

3 The referendum outcome 16.1 million voted to remain (48.1%) 17.4 million voted to leave (51.9%) A turnout of 72.2% 1992 General election last time a national vote had a higher turnout Scotland and Northern Ireland voted to remain England and Wales voted to leave London the only English region to vote to remain

4 Brexit means Brexit Prime Minister Theresa May has stated Brexit means Brexit But what does Brexit mean? We focus on the economic consequences of the UK s decision to leave the EU But what is the UK s relationship with Europe to be? Is there an off the shelf model? EEA EFTA WTO No Brexit? Appears to be a shift to Hard Brexit WTO?

5 Timeline to UK s exit is uncertain Prime Minister announced Article 50 will be triggered by March 2017 But High Court ruled against government this morning Parliament must decide on the withdrawal from the EU. Government is appealing decision. If it loses appeal then a bill to trigger Article 50 will then need to be passed by Parliament Risk to our assumption on exit timeline Assume two-year period for negotiation of withdrawal UK withdraws from EU at start of 2019 Useful upper bound for completion of withdrawal is UK General Election on 7 th May 2020 UK controls timing but little else in process

6 Standard deviations Recent developments (1) NIESR uncertainty index, quarterly Measures of uncertainty Source: NIESR. Note: Derived from principal component analysis. The series is an index with mean 0 and standard deviation 1 FTSE 100 within month standard deviation 3-month ahead option implied sterling volatility Economic Policy Uncertainty CBI uncertainty score Source: Thomson Reuters datastream,

7 Recent developments (2)

8 GDP growth of 2% in 2016 and 1.4% in 2017 Real GDP growth (per cent per quarter) Contributions to GDP growth 1.5 Forecast Source: NiGEM database; NIESR forecast Source: NiGEM database; NIESR forecast

9 Inflation (per cent per annum) CPI inflation close to 4% end 2017 Headline and core CPI inflation rates CPI inflation fan chart (per cent per annum) Forecast Source: ONS Core Headline Source: NiGEM simulations

10 Feb-16 Jul-16 Dec-16 May-17 Oct-17 Mar-18 Aug-18 Jan-19 Jun-19 Nov-19 Apr-20 Sep-20 Feb-21 Jul-21 Per cent Bank Rate at 0.25% until 2019Q3 25 bps reduction in Bank Rate Third round of QE 60 billion Purchase of up to 10bn corporate bonds Of firms that make a material contribution to the economy Face value of total eligible bonds: 110bn Term Funding Scheme 4 year term Interest rate expectations th January th April th July th October th November 2016 Source: Bank of England, sterling overnight index swap yield curve

11 THE LONG RUN

12 The task(s) ahead Negotiate EU withdrawal and new trade deal with EU Engage with other 163 WTO members (27 of which EU) Negotiate a new set of relationships that replace DG Trade s current list 148 potential negotiations 92 straightforward continuation of EU GSP with developing and less developed nations Leaves 56 live negotiations with rest of the world A useful benchmark EU has 10 active negotiations Allee and Lugg (2016) show negotiation with US largely ends with partner accepting US positions on patent protection, ISDS and agriculture. EU27 do export more to UK than UK to EU27 in absolute terms, but Relative terms importance dramatically reversed 45% of UK exports face disruption, 6.7% EU27 But depends on which EU member state Source: Holmes et al. (2016)

13 UK increasingly service based exports

14 EU dominates UK trade Source: Holmes et al. (2016)

15 Comparison of recent studies

16 Ebell (2016) new estimates on FTA effects

17 Regression Results Services (Probit) (Gravity) (3) FTA_services EEA 0.951*** 1.033*** Distance *** *** *** Border *** 0.401*** Lang official *** 0.545*** 0.538*** Colony *** 0.253** 0.238** Samecont Durable *** Polcomp ** Constant *** 9.269*** *** (pseudo) R

18 Regression Results Goods (Probit) (Gravity) (3) FTA_goods 0.228*** 0.430*** EEA 0.915*** 0.859*** Distance *** *** *** Border *** 0.698*** 0.587*** Lang official *** Colony *** 0.189* 0.254*** Samecont 0.604*** 0.445*** Durable *** Polcomp ** 0.082* Constant *** *** *** (pseudo) R

19 Trading with the World? Estimated increases in bilateral trade with 3 rd countries from forming a new FTA: Goods Services WTO rules FTA with 3 rd country 26% - 66% 0% Estimated increase in total trade from forming new FTAs: Goods Services WTO rules FTA with China 2% - 5% 0% WTO rules FTA with USA 3% - 8% 0% WTO rules FTA with Australia 0.2% - 0.5% 0% WTO rules FTAs with entire non-eea WORLD 11% - 29% 0%

20 Compare to HMT s Results Reductions in goods trade with other EEA members NIESR HMT EU Single market --> WTO rules with EU 58% - 65% 54% Single market --> FTA with EU 35% - 44% 42% Reductions in services trade with other EEA members NIESR HMT EU Single market --> WTO rules with EU 61% - 65% 19% Single market --> FTA with EU 61% - 65% 14% Key distinction: HMT use data from , 195 countries But the single market has evolved in 90s and 00s!

21 Jun 06 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 Jun 14 Jun 15 Jun 16 Thousands In the past 3 months, relative to normal Migration a key issue Long-term international migration to UK, previous 12 months Recruitment difficulties Source: ONS. EU Non-EU Source: Bank of England. Note: A positive (negative) score indicates that firms have experienced above (below) average recruitment difficulties.

22 Forecast summary

23 THANK YOU