NIESR s latest research and quarterly forecasts on the UK and the EU Referendum

Transcription

1 NIESR s latest research and quarterly forecasts on the UK and the EU Referendum Tuesday 10 th May am-12.30pm Chair: Jagjit Chadha, Director 11am Introduction Jonathan Portes: Immigration, Free Movement and the EU Referendum Angus Armstrong: EU Membership, Financial Services and Stability Simon Kirby: Short-term prospects for the UK economy (under two alternative post-eu referendum scenarios) Monique Ebell: The long-term economic impact of leaving the EU Q&A

2 Immigration, the EU and the referendum National Institute Economic Review Issue 236, May 2016 Jonathan Portes, May 10th, 2016

3 Then and now: 1975 and 2015 Source: British Election Study Do you think that too many immigrants have been let into this country, or not?

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5 Referendum impacts Vote to Remain is vote for status quo: free movement. Will settle issue Leave gives flexibility, but doesn t avoid hard choices; demand for migrant labour (both high skilled and flexible low-skilled) buoyant. 2 broad options: Restrictive: sharp reductions in EU migration combined with existing or tighter restrictions in non-eu. Could lead to substantial reductions in migration, but resulting economic damage could be severe Liberal: balance reductions in EU migration with more liberal approach to non-eu. Could mitigate or even reverse economic damage: but would still mean historically very high migration levels More NIESR analysis (Lisenkova) to come w/c May 23!

6 What s going on with the migration statistics? Content

7 May 26 th 2016 Quarterly migration statistics published ONS publish analysis of different data sources and their implications for migration stats methodology UK Stats Authority also watching closely Possible outcomes; Clean bill of health Revisions to methodology Revisions to historical stats UKSA withdrawal of National Statistics designation Impact on economic analysis of migration impacts? Watch this space!

8 EU membership, financial services and stability National Institute Economic Review Issue 236, May 2016 Angus Armstrong, May 10th, 2016

9 What is the issue? Respecting the powers of the central bank in the performance of their tasks, including the provision of central bank liquidity, within their respective jurisdictions, Agreement between EU Heads of State February, 2016

10 Four features of UK finance 1. Passporting and the presence of overseas firms o More than half largest global institutions EU HQs 2. Financial sector balance sheet = 680% GDP o Residency basis & ex derivatives o Banks account for 380% 3. Multi-currency area o Less than half bank sector assets in sterling 4. Foreign direct investment (related to passporting) o 40% is related to financial services

11 Financial infrastructure post Brexit 1. UK probably treated equivalent in regulation terms o But, a regulatory sword of Damocles 2. Direct membership of TARGET2 extends to EEA o UK banks require an EU home country sub o Would non-eea banks require EEA home country? 3. MOU between BoE and ECB for currency swaps o Would this be in interests or even credible? 4. No ECJ to enforce non-discrimination o Non-cooperative behaviour in event of crossborder failure?

12 Capital flight 1. Issue is access to financial infrastructure outside EU o Domain of central banks and legal jurisdiction 2. Stock of FDI related to financial sector around 250bn o Flow important to funding current account deficit 3. If firms look to migrate, where would they go? 4. Outcome is likely to be a higher cost of finance o Would come on top of likely sovereign downgrades (implied by credit rating agencies)

13 Prospects for the UK Economy: a bi-modal future National Institute Economic Review Issue 236, May 2016 Jessica Baker, Oriol Carreras, Monique Ebell, Ian Hurst, Simon Kirby, Jack Meaning, Rebecca Piggott and James Warren

14 Heightened uncertainty since the start of the year 4 UK uncertainty index Option-implied 3 month sterling volatility

15 A vote to remain: the outlook

16 Interest rate expectation have flattened (first interest rate rise priced in for 2020Q1)

17 The Short Term Economic Impact of Leaving the EU

18 A vote to leave: uncertainty spikes and risk premia rise Summary table of short-term shocks introduced from 2016Q3 Exchange rate premium Uncertainty Term premium Household and corporate credit premium Equity premium Calibrated from 3-month options-implied sterling volatility Betting markets and historical data Joyce et al (2011), Breedon et al (2012),Meaning and Warren (2015) Cantor and Packer (1996), Alfonso et al. (2012), Kiff et al. (2012), historical data and author s calculations Historical data and author s calculations Note: table in Review provides only initial rise in 2016Q3 Average size of shock (over first two years unless otherwise stated) 2016Q3 shock: 2/3 of the magnitude observed in Q3 shock: Three times the level in 2016Q2 60 basis points 35 basis points 35 basis points

19 A vote to leave: private sector investment, at trough, around 15% below baseline Note: active policy suggests a tightening of interest rates from It refers to an endogenous response by the MPC, represented by a Taylor Rule (using the parameters published for the Bank s model COMPASS).

20 A vote to leave: GDP negatively affected by the shock of a vote to leave; inflation spikes (relative to counterfactual) Note: active policy suggests a tightening of interest rates from It refers to an endogenous response by the MPC, represented by a Taylor Rule (using the parameters published for the Bank s model COMPASS).

21 Baseline forecast summary (assuming a vote to remain) Assuming a vote to remain Uncertainty dissipates; exchange rate appreciates GDP growth of 2% in 2016 and 2.7% in 2017 CPI inflation significantly below target in 2016 and 2017 Temporary downward pressures drop out and inflation rate close to target in 2018 Tightening phase of monetary policy to start in Nov 2016 Re-profiling of spending and tax changes in Budget 2016: absolute surplus in

22 Summary of short-term economic performance following a vote to leave scenario Heightened risk and uncertainty sterling to depreciate by around 20 per cent Intense bout of inflationary pressure Tightening of monetary and financial conditions Fall in investment, relative to counterfactual remain scenario Weigh on household incomes and wealth GDP will be 0.7-1% lower than remain counterfactual in 2017 Even as the short-term effects dissipate, the transition to the longer-run part from the shock of leaving the EU weighs on the economy

23 Long-term impact on the UK economy of leaving the EU National Institute Economic Review Issue 236, May 2016 Monique Ebell and James Warren

24 Headline Results % decrease Switzerland WTO WTO+ GDP % % 7.8% Real wages % % 7.0% Consumption % % 9.2% All results are % declines compared to the 2030 baseline of remaining in the EU Switzerland and WTO focus on trade and FDI effects WTO+ adds a 5% productivity drop to WTO-optimistic

25 Key Mechanism Reduced access for the UK to EU markets Demand for UK exports falls Prices of UK exports fall Sterling depreciates Import prices rise Deterioration in the terms of trade UK poorer because no longer gaining as much from trade Consumption, GDP and real wages all fall

26 GDP, compared to baseline forecast 2,700 2,500 2,300 2,100 1,900 1,700 1,500 CH OPT CH PESS WTO OPT WTO PESS WTO OPT+ Data Baseline Forecast

27 Euro- exchange rate CH OPT CH PESS WTO OPT WTO PESS WTO OPT+ Data Baseline

28 Consumption per capita, constant prices 23,000 22,000 21,000 20,000 19,000 18,000 17,000 16, CH OPT CH PESS WTO OPT WTO PESS WTO OPT+ Data Baseline

29 Unemployment rate, % CH OPT CH PESS WTO OPT WTO PESS WTO OPT+ Data Baseline

30 Risks to the long-run Brexit forecast Upside Risks, might reduce losses in WTO cases Deregulation, gains estimated by Open Europe at 12.8 bn annually Migration, if optimal migration policy were achieved Downside Risks, might further increase losses Productivity, may be large Scotland, Northern Ireland debt? Migration skill shortages, skill mismatches