There is a 35 to 40 per cent chance that the UK will vote to leave the European Union when the referendum takes place in June, says a report released today by research company IHS Global Insight.
There is general agreement that the UK would be hurt in the immediate aftermath of a Brexit vote, the report says, predicting the country would experience a significant hit to GDP from the second half of 2016, through 2017, and most likely into 2018.
Heightened uncertainty would hit business confidence leading to reduced employment and investment plans. The sterling would fall sharply and consumer price inflation would rise, hitting consumer spending power.
In the long term, the economic impact of the UK’s exit from the European Union would be dependent on whether the government negotiated a “soft” or “hard” exit.
“One issue that would have a significant influence on how the UK economy fared over this period is how amicable, constructive and successful the UK’s negotiations were with the EU,” said Howard Archer, chief European and UK economist for IHS Global Insight.
The report warned the EU would likely harbour resentment to the UK during negotiations. More importantly, allowing the UK the benefits of EU membership without the costs would undermine its raison d’etre and would risk other members following the UK’s lead.
In the case of a “soft” exit, Britain would negotiate full trade agreements and access to the European single market, while limiting migration policy to one that attracts highly-skilled workers. However, the report warned this would hurt UK’s competitiveness by putting upward pressure on labour costs.
In a best case scenario the UK would make “efficient, meaningful” progress on deregulation in the best interests of business and to encourage foreign direct investment, says IHS Global Insight.
Under a “hard” exit scenario, negotiations would be contentious and lengthy and the UK would be excluded or have limited access to the single market, the report states. The City would lose business to Frankfurt and Paris, and the reduced workforce would limit the UK’s growth potential.
The report said the likely outcome would fall somewhere between these two scenarios.
Paradoxically, the report suggested the EU may experience some positive effects from a UK exit, including a more homogenous membership and greater awareness about the benefits of the union.