BREAKING NEWS

BREAKING NEWS

What you need to know about the bombshell Brexit reports

 Comments
Now Reading :

What you need to know about the bombshell Brexit reports

Britain's Prime Minister Theresa May on Nov 28, 2018.
@ Copyright :
REUTERS/Henry Nicholls
Text size Aa Aa

Two major reports were released on Wednesday by the British government and the Bank of England, assessing the potential damage to the UK's economy in different Brexit scenarios.

In its "EU Exit: Long-term economic analysis", experts from the UK Treasury evaluated how different Brexit scenarios will impact the British economy. They found that although a soft exit from the bloc will be less damaging than a no deal departure, Britain's GDP will still be significantly lower in 15 years' time as a result of the divorce.

The report compares the likely impact of the Chequers Agreement, which was approved by the British Cabinet in July before being shelved following the resignation of two ministers and criticism from the EU. It also looks at a Norway-style membership, a Canada-style agreement and a no-deal scenario.

For each model, the economists produced estimates for a best and worst case scenario.

A separate report released by the Bank of England several hours later also compared the worst case scenarios for an economic partnership that would be "less close" than partnership inside the EU, and a no-deal "disruptive Brexit."

Here is how their assessments compare:

Chequers plan

The so-called Chequers plan was released in July by Prime Minister Theresa May, who said it had received full Cabinet approval. Yet, two key ministers quickly resigned in protest — Boris Johnson, then-foreign minister, and former Brexit secretary David Davis.

They criticised it for being too soft. The plan proposed maintaining a common rulebook for all goods, the creation of a system to facilitate customs arrangement through which the UK could collect tariffs for the EU, and offered concessions on the role of the European Court of Justice.

Economists at the UK Treasury estimate that if the Chequers plan had been used, British GDP would have been 0.6% lower come 2035-2036 than it would have if the country remained in the EU.

Under the worst case scenario, GDP would be 2.5% lower.

The Bank of England report didn't address the Chequers plan directly, but said that a close economic partnership with the EU could boost the UK's economy by up to 2%.

Norway-style deal

The Norway model has been cited as a possible blueprint for a Brexit deal, particularly by those who had campaigned for the UK to stay in the EU.

Norway is as close to being an EU member state as one can be without actually being in the bloc because it is a member of the European Economic Area (EEA) and the European Free Trade Association (EFTA).

These give it full access to the EU single market which means it has to contend with few, if any, restrictions to trade with the bloc. The country secures this privileged access by making contributions to the EU budget and by abiding by EU legislations despite not being able to influence decision-making.

Under this model, Britain's GDP would be 1.4% worse off in 2035-2036 than if it stayed in the bloc, according to the government report.

The Bank of England said maintaining a close economic partnership with the EU could help boost the UK's economy by up to 2%.

Canada-style agreement

The Canada-EU free trade agreement was signed in 2017 after more than seven years of negotiations.

It has been hailed as "the most ambitious trade agreement that the EU has ever concluded" partly because it removes trade barriers on over 98% of goods.

Brexiteers including Boris Johnson have championed this model because it doesn't oblige Canada to pay into the EU budget, accept freedom of movement or fall under the European Court of Justice's jurisdiction.

But critics of its application as a Brexit blueprint have pointed out that it is light on trade in services. In 2017, services accounted for 40% of all UK exports to the EU.

According to the Treasury's report, the hit to Britain's 2035 GDP would range from 4.9% to 6.7%.

The Bank of England was slightly less pessimistic. The report estimated, under a Canada-style agreement, the UK economy could drop up to 4%.

No-deal exit

The UK economy would be most impacted in the long-term if the country crashed out of the EU without a deal, the Treasury concluded.

A return to World Trade Organisation rules could see British GDP be as much as 10.7% lower in 2035 than it would be in the EU. In the best case scenario, a no-deal exit would still result in GDP being 7.7% lower, according to the Treasury report.

The Bank of England report predicted a similar scenario, saying the economy could fall up to 8%, in the case of a no deal "disruptive Brexit."

Draft Brexit deal

Neither document directly evaluates the impact of the draft Brexit deal approved by EU leaders on Sunday.

The Treasury analysis did look at a more stringent version of the Chequers plan, which commentators say probably comes closest to what was agreed between British and European negotiators.

Under that model, the hit to Britain's 2035 GDP would range from 2.1% to 3.9%.

How the pound reacted

The decision to leave the EU in June 2016 sent the British currency on a weakening course. Before the referendum the pound sterling hovered at around $1.48; nowadays it is around $1.28.

Each development in the Brexit negotiations has reverberated on the currency.

Its value plummeted 1.6% after the ruling Conservative Party lost its parliamentary majority in June last year. Last month, it tumbled an incredible 1.9% after two ministers quit in protest over the draft Brexit deal.

The reports didn't immediately have any major effect on the pound, mostly because a hit to the economy due to Brexit has largely been priced in.

Traders have instead urned their attention to the crucial December 11 vote as fears are MPs will vote down the draft Brexit agreement leading to a no-deal exit.

A Bloomberg poll of 17 economists released on Wednesday estimates that MPs rejecting the deal is the more likely outcome at 55% vs 45%.

They expect the currency to weaken to $1.25 if that is the case. Should May secure approval, they forecast the pound could shoot up to $1.34.

Treasury vs Bank of England statistics

While there were differences between the reports from the UK Treasury and the Bank of England, the estimates based on scenarios were fairly similar.

And we're reminded that these are scenarios, not exact estimates of what will happen when the UK leaves the European Union.