Leaving the European Union without a trade deal won’t be cheap.
According to analysis by Rabobank, a so-called hard Brexit would cost about 11,500 pounds ($15,000) per British worker by 2030, the equivalent of 18 percent of GDP growth. Ministers this week detailed some contingency plans for leaving the bloc with no deal in place, suggesting they’re considering it as a distinct possibility.
Barriers to trade, lower investment, a loss of financial services and lower immigration would all weigh on growth, according to the report, written by economists including Hugo Erken and Raphie Hayat. “We deviate strongly from previous studies in our approach and assumptions and find much higher costs associated with Brexit,” they said.
Chancellor of the Exchequer Philip Hammond said Wednesday that he will start releasing more money to help prepare for a “no deal” Brexit if there aren’t clear signs of progress in talks with the European Union by early next year. The government also set out plans for leaving without a deal on customs earlier this week.
The U.K. has until March 2019 to secure a new trading relationship with the bloc, and Prime Minister Theresa May has pledged a two-year transitional period to shift to it. But negotiations with the EU are currently stuck, increasing the chances of the worst-case scenario in which no deal is reached.
The government’s options for mitigating any economic hit from Brexit — like reducing corporate taxes, saving on budget contributions or making fresh trade agreements with non-EU countries — have limited scope for offsetting the negative impact, the economists said. Tax reductions would have to be balanced out by increases elsewhere and the U.K. will probably have to pay some amount to the EU budget to maintain access to the market, as well as paying a divorce settlement.
Striking new trade deals will also be difficult without the “critical mass” of the EU to retaliate in any disputes, Rabobank said. One silver lining will be the labor market, where damage will be limited, according to the economists.
Even if the U.K. manages to strike a deal with the bloc, it will still enter a two-year recession once it leaves in 2019, according to Rabobank. It sees a GDP decline of 1.1 percent in that period if the U.K. secures a free-trade deal with the remaining 27 EU countries, and a decline of 2.4 percent if it’s unable to. Potential output will also be held back by lower productivity, the economists said.
U.K. Trade Policy Observatory economist Michael Gasiorek said Wednesday that it’s unlikely that the two sides will agree on the terms of a transitional period before the deadline. They should seriously consider requesting an extension of the talks beyond March 2019, “controversial as that would be on all sides,” he said in a blog post.
Hard Brexit Would Cost UK $15000 Per Person, Rabobank Says – Bloomberg