The IMF sees Brexit’s ‘substantial impact’ while the world’s economy holds its breath

Photo taken outside the House of Commons on 20 June 2016. Hundreds of people have showed their sorrow and paid tribute to the tragic loss of Jo Cox's life. This photo was taken by the European Sting during its London coverage of the EU referendum (The European Sting, 20/06/2016)

A European Sting Photo taken outside the House of Commons on 20 June 2016. Hundreds of people have showed their sorrow and paid tribute to the tragic loss of Jo Cox’s life. This photo was taken by the European Sting during the newspaper’s London coverage of the EU referendum (The European Sting, 20/06/2016)

The International Monetary Fund last Friday published what will most likely remain its most detailed analysis on a “Brexit” scenario, calling the impact of Britain’s departure from the European Union “negative and substantial”. With only two days to go until the referendum, it is clear more than ever that the economic field now is where the toughest match is being played to convince voters. However, the real impact of such a history-changing move might be only quantified in the years to come.

IMF study

After having promised for a long time its official estimates on a possible Brexit, the IMF last Friday used its annual report on the British economy to weigh the impact of the June 23 vote. Despite still keeping an often claimed “neutral” position on the matter, the IMF leaves no doubt: an exit from the EU would see no economic advantage for British economy, and would only drag the country into uncertainty as a first effect.

A decision by UK voters to exit the EU would subsequently kick off negotiations between the UK and the rest of the EU over the terms of its withdrawal and over the details of its future relationship with the Union. “The UK would likewise need to renegotiate trade relationships with the 60 non-EU economies where trade is currently governed by EU agreements”, the official IMF statement claimed.

This negotiations, according to the IMF, could drag on for years, leading to a period of heightened uncertainty and risk aversion, which in turn would discourage consumption and investment and roil financial markets. “In the long run, most formal assessments agree that the UK would be worse off economically if it were to leave the EU”, IMF officers explained, “as higher trade and financial barriers would lead to lower output and incomes”.

Impact quantified

The IMF explored the potential impact of uncertainty on UK growth during the post-Brexit transition in two different scenarios, referred to as the “limited scenario” and the “adverse scenario”. In the limited scenario, in which uncertainty is relatively moderate and the UK is assumed to negotiate a status similar to what exists between Norway and the EU, output falls by 1.4 percent by 2019 (compared to the baseline case in which the UK remains in the EU). In the adverse scenario of long negotiations and a default to the trade rules of the World Trade Organization, Britain would fall into recession in 2017 and its GDP would plunge by 5.6 percent by 2019, again compared to the baseline case in which the UK remains in the EU.

So in both cases, the IMF findings show that a Brexit would seriously hit British living standards and would anyway have negative impact on macro-economic indicators and employment. “The longer this uncertainty persists, and the less advantageous the outcome of trade negotiations for the UK, the larger are these short- and medium-run costs”, the IMF underscored in its statement. The adverse scenario presented by the IMF of course is not considering the possibility that Britain would secure a trade deal quickly, and that the level of investments and consumer spending would only be limited for a short period – something already experienced during the recent global economic crisis. This is indeed something that a few analysts believe it could happen, as reported by the Economist.

IMF Chief’s words

In a speech in Vienna, IMF Chief Christine Lagarde underlined the importance of a victory of the “remain” vote towards economic benefits. “We have already been on record that the economic risks of leaving are firmly to the downside”, Lagarde said. “There is a clear case as to how the UK has benefited and will continue to benefit from its membership in the European Union”.

“Being part of the EU has greatly aided the transformation of the U.K. into a dynamic and vibrant economy”, Madame Lagarde added. “The U.K. has benefited from the many contributions of talented and hard-working migrants from all over the world, including the EU, while providing record-high levels of employment for all its residents”, she declared.

Brexit backers’ point

There’s also those who believe a Brexit would not throw Britain into recession though. Responding to the latest IMF remarks, Matthew Elliott, chief executive of Vote Leave declared that Mr. Lagarde openly decided to forego any mention to possible positive results a Brexit would give. “The IMF has chosen to ignore the positive benefits of leaving the EU and instead focused only on the supposed negatives”, the Guardian quoted Mr. Elliott as saying. “If we vote leave, we can create 300,000 jobs by doing trade deals with fast growing economies across the globe. We can stop sending the £350m we pay Brussels every week. That is why it is safer to vote leave.”

A group of eight well known economists have released a report under the banner of “Economists for Brexit”, explaining how they think leaving the EU would be even good for the UK economy. They predict that, in 2020, the UK economy would grow 3.4% if the UK left the EU, while it would grow only 2.5% if the UK remained, as reported by the BBC. The basis of their assumptions is that after leaving the EU, the UK would trade under World Trade Organisation rules and immediately drop all tariffs on imports from everywhere in the world to reduce the prices of products for people in Britain, the BBC explained in a report at the end of April.

Effects on the Stock exchange

However, negative effects on production and consumer spending are not the only risks that a Britain outside of the EU would have to face. The impacts on Stock Markets, with effects on currencies and possible shockwaves through the global economy, are reported to be consistent. The Bank of England made it clear just one day before the report by the IMF was published: the risk for the pound sterling are real. According to the latest studies by the BOE, indeed, a vote to leave the EU in the referendum would push the pound “sharply lower”.

“In the weeks since the ‘May Report’, an increasing range of financial asset prices has become more sensitive to market perceptions of the likely outcome of the forthcoming EU referendum”, the BOE explained last Thursday in its latest Monetary Policy Summary. “On the evidence of the recent behaviour of the foreign exchange market, it appears increasingly likely that, were the UK to vote to leave the EU, sterling’s exchange rate would fall further, perhaps sharply”, the BOE statement said.

Pound Sterling to fall “sharply”

According to Economist Intelligence Unit, which is part of the Economist Group, the situation would be even worse: the pound would fall 14-15% against the US dollar in the course of this year, and the UK would even risk losing its status as a global financial centre. The pound has already weakened during this tough run to the vote: last Thursday, Sterling fell throughout the afternoon, down around 1.3% against the dollar to $1.4016, but gained ground in late trading to $1.4152. The decision by the BOE to keep interest rates at their record low of 0.5%, with also claims of a Brexit as “the biggest immediate risk to UK financial markets”, say how much BOE officials are worried.

Headaches in America

The Bank of England is not the only one to be suffering from unrest. American businesses are indeed currently weighing possible impacts of a Brexit, and the feelings around those studies are not idyllic. In a recent analysis, the Washington Post calls the possible effects of the UK leaving the 28-country bloc as a threat “to more than a trillion dollars in investment and trade with the United States”. The United States represent indeed the largest single investor in Britain, and the stars-and-stripes press, including the prestigious Washington-based paper, is already counting down risks. Most of US firms indeed believe that a Brexit would jeopardize their access to those markets, as Britain is currently seen as the main gateway to the EU. The Washington Post supposes many US firms would potentially consider relocating their European operations elsewhere.

Facing the unpredictable

All in all, the truth is that no one knows what a leave vote would bring, and nor can anyone measure it. The shockwaves that such a life-changing moment would generate, given the unique nature of it, are truly unpredictable. The world has learnt during the global financial crisis that began in 2008 that is barely impossible to analyse the effects of such enormous potential economic revolutions. While challenged by the BBC on whether there would be a problem with the predictions by the IMF and a possible lack of credibility, IMF Chief Lagarde said that some of them may be right while some other may be wrong. “But when all of them except one particular institution… are heading in the same direction, I think it’s compelling”.

Emanuel Adam, head of policy and trade for BritishAmerican Business, while interviewed by the Washington Post last week said: “Nobody knows at this point how the world would look like with the UK out of the EU”.

“This alone creates an uncertainty that businesses don’t wish to see”, he added, and rather hit a bull’s eye like that.

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Featured Stings

The EU Commission predicts a decimated growth in the next years

Deutsche Bank: the next financial crisis is here and the lenders need €150 billion from taxpayers

Catalonia’s vote for independence and the power of symbols

G20 LIVE: World Leaders in Turkey for G20 Summit. Global Economy will be discussed in Antalya

Brexit: when the hubris of one man can set the UK, the EU and the entire world on fire

Yes, together we can make a change! YO!Fest and EYE 2016

daniela-runchi-jade-president__

A Sting Exclusive: “Education in Europe, fostering skills development inside and outside the school system”

EU to lead one more fight against climate change at G7 summit

China invites the EU to a joint endeavor for free trade and order in the world

Landmark EU Parliament – ECB agreement on bank supervision

EU Council: The US airlines may freely pollute the European air

Hostages to a rampant banking system

Eurozone in trouble after Nicosia’s ‘no’

Fighting for minds of youth in Latvia

The Monetary Union drives Europe into dangerous paths, CoR demands an EMU of regional content

COP21 Breaking News_04 December: Launch of CREWS, climate risk & early warning systems

One more country to test the EU project: Kaczynski’s Poland

MWC 2016 LIVE: Intel focuses on 5G “beyond the Powerpoint”

Greece @ MWC14: Greek-born mobile champions at MWC 2014

Do the EU policies on agro-food smell?

EU Commission: Once in every 20 beef meals you eat…horse probably with drugs in it

G20 World Exclusive Interview: “The world, especially emerging economies and developing countries, require a more sustainable and quality development”, the Spokesperson of Japan underscores live from Antalya Turkey

EU’s social crisis and unemployment to deteriorate

Did Draghi ask the Germans to accept a drastic change of austerity policies?

The Eurogroup protects Germany and blames others

The British “nonsense”, the relaxed Commissioner and the TTIP “chiaroscuro” at this week’s Council

On Google antitrust case: “Let’s face it, some companies want to hurt Google and it goes as simple as that”

Appreciation of euro to continue

Teamgum @ TheNextWeb 2014

No end to Deutsche Bank’s problems: new litigations in the US and frailty in EU stress test

Commission Vice-President Rehn exaggerates Eurozone’s growth prospects

A Sting Exclusive: “Doing ourselves a favour”, Vice President Dombrovskis underscores that this time growth has to come from within the EU

Volkswagen getting away with it in Europe

EU: Divided they stand on immigration and Trump hurricanes

Is the European Banking Union an impossible task?

The ECB proposes a swift solution for SMEs’ financing

WEF Davos 2016 LIVE: “Chinese economy has great potential, resilience and ample space for policy adjustment”, China’s Vice President Li Yuanchao reassures from Davos

Marco Polo’s Dream

No agreement in sight on EU budget

ECB readies itself for extraordinary monetary measures defying Germany

A Sting Exclusive: “One year on from the VW scandal and EU consumers are still in the dark”, BEUC’s Head highlights from Brussels

Do you dare to go to China?

The West definitively cuts Russia off from the developed world

What happens when the Eurogroup decides to help Greece


Re-thinking citizenship education: bringing young people back to the ballot box

At last a good price for the Greek debt!

Who is responsible for public health? The tendencies and its benefits –or not– on Health Education around the world

Community Manager – 1289

MWC 2016 LIVE: BT chief aims to be at UK 5G forefront

Can We(esterners) ever understand (the) Chinese

Has Germany rebuffed ECB on the banking union?

Parliament votes reform for better European Co2 market but critics want it sooner than later

Royal Navy to unveil future surveillance and reconnaissance requirements next February in Rome

€5 billion of EU energy efficiency project money spent on “comfort”

An ECB banker wants to change the European social model

Tax evasion and fraud threaten the European project

Five years down the drain

ECB: Growth measures even before the German elections

Unemployment and immigrants haunt the EU; who can offer relief?

WEF Davos 2016 LIVE: “CO2 is not the problem, it is the symptom”, the pilots who crossed the world using solar energy cry out from Davos

More Stings?

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s