Economic Forecasts

Key Questions

How much and for how long will our economy be affected by Exit?

What will be the cost to us of generating growth outside the EU?

Will our trade with the EU and the weakness of the £ recover from the shock of Exit?

General Comments

Martin Lewis has written an excellent article on his blog where he says: “Anyone who tells you they know what will happen if we leave the EU is lying. Predicting exact numbers for economic, immigration, or house price change is nonsense”.

George Box said: “All models are wrong but some are useful”. In this context it is difficult to find which ones are useful.

What goes into a forecast governs what comes out and the assumptions behind the Government’s model have been based on past EU trade agreements that are not entirely relevant to us. Therefore although it is apparently arithmetically rigorous we wonder whether it is a good balance between the intellect and reality.

Government Forecasts

It seems to be generally accepted that the short term effects of the uncertainty following Exit will be painful.

Treasury report on long term effects of exit

“If we take as a central assumption that the UK would seek a negotiated bilateral agreement, like Canada has, the costs to Britain are clear. Based on the Treasury’s estimates, our GDP would be 6.2% lower, families would be £4,300 worse off and our tax receipts would  face an annual £36 billion black hole.”

The Comment “worse off” is applying to the level of GDP of the UK and it assumes no change in the number of households. It is not the same as income nor is it a measure of a family’s wealth.

Although the calculations are regarded as being very accurate, we do have some fundamental problems with a forecast for the next 15 years. If you think what has happened at any time in the last 15 years, it would not take much to totally undo many assumptions.

Treasury Report on short term effects of exit

The analysis shows that the economy would fall into recession with four quarters of negative growth. After two years, GDP would be around 3.6% lower in the shock scenario compared with a vote to remain. In this scenario, the analysis shows that the fall in the value of
the pound would be around 12%, and unemployment would increase by around 500,000.
There have been many sceptical comments about this report even amongst its supporters. No other forecaster is predicting a recession anywhere near this amount and employment is generally expected to recover. It assumes that the Bank of England will do nothing to help the situation.
Inflation and fall in stock market investment would reduce state pension by £137 p.a.
Total assets in pensions would fall by between £170 billion and £300 billion.
A vote to leave the EU could materially alter the outlook for output and inflation, and therefore the appropriate setting of monetary policy. Households could defer consumption and firms delay investment, lowering labour demand and causing unemployment to rise. At the same time, supply growth is likely to be lower over the forecast period, reflecting slower capital accumulation and the need to reallocate resources. Sterling is also likely to depreciate further, perhaps sharply.
“..impact of lower GDP growth and extra borrowing costs would knock a £20bn to £40bn hole in the government’s finances by 2020 and leave ministers struggling to balance the books before 2022, two years later than forecast”
Independent forecasts

In the short term it seems to be agreed that the uncertainty of the terms of exit will not be good for the £ or the economy. You can read their conclusions:

The FT did an interesting analysis of the models

PwC report for CBI

LSE Centre for Economic Performance

Open Europe

Property Academy

OECD report

The numbers can come from various sources but here is a useful list:

Knoema has a very useful summary of several sources

The EU has its own forecasts

The OECD has worldwide forecasts

Economic Intelligence Unit is very thorough on the worldwide report

The Centre for European Reform analyses how the UK is intertwined with the EU

Global Counsel has done an interesting study of the other side: i.e. the effect on Europe of us leaving

Full Fact analysis of the difference between the economic forecasts