Leaving EU would cause a serious shock to UK economy - new PwC analysis
Brexit could cost UK economy £100 billion and 950,000 jobs by 2020
CBI Director-General, Carolyn Fairbairn, has warned that leaving the EU would cause a serious shock to the UK economy, with a potential cost to UK GDP of £100 billion and 950,000 jobs by 2020 and negative echoes that could last many years after that.
Download the full report here
In an economics lecture at London Business School the CBI will analyse the potential impact of the UK leaving the EU - on trade, investment, jobs and growth. To quantify the impact on the economy, the CBI commissioned professional services firm PwC to examine two different exit scenarios: one at the optimistic end of the range, and the other recognising the likelihood of difficult trade negotiations but nonetheless with trade deals being concluded. Both scenarios use moderate assumptions – significantly more pessimistic cases could be constructed.
Under both PwC scenarios, UK living standards, GDP and employment are significantly reduced compared with staying. The analysis indicates a cost to the British economy of leaving of as much as £100 billion – the equivalent of around 5% of GDP - by 2020. Even in a scenario where a Free Trade Agreement with the EU is secured rapidly, the analysis indicates GDP could be 3% lower by 2020. GDP per household in 2020 could be between £2100 and £3700 lower, and the UK’s unemployment rate between 2 and 3 percentage points higher, than if the UK had remained in the EU. GDP growth in the years 2017-2020 could be seriously reduced – and possibly be as low as zero in 2017 or 2018.
Read the full speech here
Carolyn Fairbairn, CBI Director-General, said:
“This analysis shows very clearly why leaving the European Union would be a real blow for living standards, jobs and growth.
“The savings from reduced EU budget contributions and regulation are greatly outweighed by the negative impact on trade and investment. Even in the best case this would cause a serious shock to the UK economy.
“By 2020, the overall cost to the economy could be as much as £100 billion and 950,000 jobs. Household income in 2020 could be up to £3700 lower than it would otherwise have been. The economy would slowly recover over time, but never quite tracks back to where it would have been. Leaving the EU would mean a smaller economy in 2030.
“The findings from PwC’s independent study also explain why the majority of UK businesses are in favour of remaining within the European Union. Even under optimistic assumptions, an exit triggers serious economic disruption.”
Under the ‘FTA scenario’, the UK negotiates a free trade agreement with no tariffs on exports and imports between the UK and Europe by 2020. As it is no longer in the Single Market, it experiences a modest rise in non-trade barriers. The UK is assumed to maintain existing free trade agreements with other countries currently held by the EU, and signs a new trade deal with the US.
The ‘WTO scenario’ is based on the UK failing to secure a deal with the EU and therefore trading under World Trade Organisation rules after leaving. Tariff and non-tariff barriers with the EU rise significantly. The UK loses its existing free trade agreements with other countries, but renegotiates them on the same terms by 2026 and signs a deal with the US in the same year.
This new analysis comes a week after the CBI reaffirmed its strong member mandate to make the economic case to remain in the EU following a thorough consultation process. In addition, it published an independent ComRes survey of CBI members - who employ one third of all private sector employees - which found that 80% believe being part of the EU is best for their business and 77% said it was better for the UK economy as a whole.
In her lecture, Carolyn will focus on the lack of attractive alternatives to full EU membership and the impact of leaving on trade, regulation, investment and uncertainty.
The CBI Director-General will give the economics lecture to senior business leaders, alongside Rain Newton-Smith, CBI Economics Director.
On the prospects of securing a deal with the EU, Rain Newton-Smith, will say:
“A process for leaving is set out in Article 50 of the Lisbon Treaty, but it’s worth saying that Article 50 has never been triggered. By choosing this path the UK would be taking unprecedented action.
“We know that the European Commission would draw up an exit agreement. This would then be agreed by qualified majority in the European Parliament and Council, before being offered to the UK. The UK can’t participate in the discussions about its withdrawal at the Council and it can’t vote on it in the Parliament.
“In trading terms as well, the EU would hold the balance of power. Some see the fact that we import more from the EU than we export to it as proof that they need us more than we need them.
“But this ignores the fact that 45% of the UK’s exports go to the EU, it’s our biggest export market by far - compared to just 7% of total EU exports which come here. So while it may be in both sides’ interest to complete a trade deal, the balance of power would be far from equal.”
On trading with the EU, Carolyn will say:
“If the UK leaves the EU without a free trade deal, 90% of British exports to the EU, by value, could face tariffs. Some sectors could be hit particularly hard. Under WTO rules, UK textile exports to the EU could face tariffs of nearly 10%. Transport equipment could face tariffs of about 7%.
“Products imported from the EU into the UK could also face tariffs – passing the costs onto customers through higher prices. Even as part of the EEA or EFTA, rules of origin reporting and VAT payments at borders make it harder for small firms to trade with the EU.
“So, in short, leaving the EU could mean the return of significant barriers to trade.”
On trade deals with other countries, Carolyn will say:
“For the UK, being part of the EU lets us go ‘toe-to-toe’ with other economic giants around the world in its negotiations. Some argue that, outside the EU, the UK could get deals signed faster. We wouldn’t have to consider the complex positions of 27 other countries in our negotiations.
“However, by leaving, the UK would drop out of the EU trade deals with other countries which it has at the moment – and have to renegotiate them from scratch. This is in part a capability point. We haven’t had the trade negotiators to do this for about 40 years. It is also a capacity point. We’d need to negotiate many new deals at the same time.
“The UK would also risk being at the back of the queue, with many countries preferring to negotiate comprehensive deals with regional blocs. And as a country of 64 million people the UK would inevitably have less influence than a bloc of over 500 million.
“As a consequence, it’s hard to imagine the outcome would be better deals than the UK has today, unless we somehow managed to negotiate better free trade deals than currently exist anywhere in the world: with the EU; with the 50 countries covered by EU trade deals, and with countries like the US with which the EU is still negotiating.
“Over the next five years, the UK’s trade position would not be improved by leaving, and would almost certainly be worsened.”
While acknowledging that poorly-designed EU regulation is a source of frustration for many businesses, the research finds that the post-exit benefits of reducing regulatory costs are likely to be relatively small in macro-economic terms. PwC estimates that economic gain to be around 0.3% of GDP in 2030 in the two scenarios. This effect reflects some cost savings for business, particularly in sectors that are relatively labour and energy-intensive.
Carolyn will add:
“Then there’s the Working Time Directive. Most of the cost of this comes from annual holiday and rest break entitlements – which are likely to remain whether the UK is in the EU or not. Some of the regulatory savings often cited would be illusory.
“And we would need to bear in mind the constraints that may come with a new trade deal with the EU post-exit. For example, if the UK followed the Norway model and joined the EEA, it would keep nearly 95% of the most costly regulations already in place.
“And, like Norway which adopts 75% of EU law, the UK would be required to adopt new EU law.
“Even the Canadian Free Trade Agreement stipulates that Canada – more than 2,000 miles away from continental Europe – has to implement a range of EU standards.”
On investment and uncertainty:
In the short-term, there would be economic and political uncertainty around the UK’s future relationship with other EU countries if the UK voted to leave the EU. This is because it would take at least two years and perhaps longer before the relationship is clarified. That uncertainty could be manifested in increased financial market and exchange rate volatility, along with an impact on business confidence.
The PwC research finds that under the WTO scenario investment could fall by a quarter by 2020, and would still be 10% lower by 2030, compared with the UK staying in. With a Free Trade Agreement, investment would still be around 16% less by 2020, compared to the UK remaining in the EU.
Rain Newton-Smith, will add:
“Uncertainty over the UK’s EU membership is already having a negative impact on investment plans for some of our members with decisions delayed, though this impact is not widespread.
“And a vote to leave would reduce investment further – as decisions are not just delayed but diverted elsewhere.
“The period of uncertainty is likely to linger for the full duration of the transition period to a new trading relationship with the EU. Under the defined EU exit process of Article 50, this could potentially last a decade.”
Concluding, Carolyn will say:
“None of the alternatives on the table offer the same access to and influence over the EU single market as full EU membership.
“On the impact for business – it is hard to see circumstances under which the UK could secure a better set of deals on trade and investment outside the EU. Leaving the EU would hit some of the UK’s top sectors hardest. And current global uncertainty means that now could be one of the worst times to leave.
“And on the wider impact for growth – we’ve seen that, whether or not the UK managed to secure a rapid deal with the EU, the UK would be unlikely to recover from Brexit’s impact on growth in the next 15 years. In the best case scenario we could lose 550,000 jobs over the next 4 years, while trading under WTO rules it could be closer to one million.
“At the CBI we’ve heard from a range of firms of different sizes, sectors and from different parts of the country - and we’ve consistently heard from our members that the majority – though not all – want to stay in a reformed European Union.”
Andrew Sentance, Senior Economic Adviser, PwC, commented: "The three big impacts of leaving the EU we have been able to identify are increased uncertainty, a negative shock to trade and investment, and reduced labour supply through migration. While the potential to reduce the burden of regulation and lower fiscal contributions to the EU could be offsets, the net impact of the UK leaving the EU is still likely to be negative for GDP, employment and living standards, both in the short-term and the long-term."
Examples from businesses on why being inside the EU matters for them can be found here.
Notes to Editors
FTA scenario: The UK exits and negotiates an FTA with the EU, based on tariff-free trade in goods (but not services).The UK would have to implement EU standards on goods supplied to the EU, but otherwise would not be bound by the four freedoms of the Single Market. The net inflow of low-skilled migrants from the EU could cease. However, this scenario reflects a case where the Government is able to secure greater flexibility over its immigration policy by relaxing rules for highly-skilled migrants from
both EU and non-EU countries. The UK grandfathers all existing FTAs that the EU has with third-party countries after it leaves the EU. It also uses its freedom to pursue its external trade policy by negotiating an FTA with the US. The UK would no longer have to make budgetary contributions to the EU. We have assumed the UK would also gain greater control over regulatory policy, which could result in some regulatory cost savings. However, there could also be some regulatory divergence between the UK and EU over time, leading to an increase in non-tariff barriers.
WTO scenario: The UK exits the EU and then trades with the EU on the WTO’s Most-Favoured Nation (MFN) basis, which means that the UK would no longer enjoy tariff-free trade in goods with the EU. The UK would not be bound by the EU four freedoms. The net inflow of low-skilled migrants from the EU could cease. However, unlike the FTA scenario, there is assumed to be no corresponding relaxation in immigration rules for high-skilled migrants from both EU and non-EU countries. The Government would gain greater control over regulatory policy, which could result in some regulatory cost savings. However, there could also be some regulatory divergence between the UK and EU over time, leading to an increase in non-tariff barriers. We also assume that current FTAs between the EU and third-party countries no longer apply to the UK once it exits the EU, and trade with those countries reverts to a WTO MFN basis between 2020 and 2026 until new arrangements are put in place. The UK could use its freedom to pursue its external trade policy by negotiating an FTA with the US, but we assume this takes longer than in the FTA scenario to come into force. The UK would no longer contribute to the EU budget.