‘Brexit to sink sterling by 20%’, says UK institute Niesr

The UK economy will this year grow less than previously estimated and a vote to leave the EU would send sterling tumbling and further damage the outlook, the UK’s National Institute of Economic and Social Research (Niesr) said.

Niesr said a Brexit in the June 23 referendum would slow 2017 growth by about 0.8 percentage points and cut one percentage point from the level of GDP. 

It also lowered its 2016 projection to 2% from 2.3%.

“A vote to leave the EU would represent a significant shock,” Niesr said. 

“This shock would be likely to manifest itself through a number of channels, some of which might be expected to be relatively short-lived, predominantly affecting the near-term outlook.”

Warnings about the impact of a Brexit have been coming in force this week, with chancellor of the exchequer George Osborne saying people would be worse off and UK prime minister David Cameron saying a split would jeopardise peace in Europe. 

The Trades Union Congress said yesterday that UK employees face working “excessive” hours if the UK votes to leave.

Niesr presented short and long-term prospects in the event of a Brexit.

 In the short-term projections, the pound drops by around 20% against a basket of currencies and financial conditions tighten, which would depress private-sector demand. 

While Niesr said these effects would be significant, they said they were not talking about a recession.

The plunge in sterling would boost inflationary pressure, causing price growth to jump by as much as 4 percentage points more in 2017 than in the ‘Remain’ forecast.

On a long-term basis, Niesr looked forward to 2030 and considered different scenarios centering on trade and foreign investment. 

The most optimistic see the UK retain access like Norway and Switzerland, while the least optimistic assumed no free-trade agreement and a 5% productivity shock.

In all scenarios, demand for exports falls, and consumption, real wages and GDP all drop by 2030. 

Under the most pessimistic model, real wages decline as much as 7%, consumption drops as much as 9.2%, and sterling falls below parity with the euro.

The forecasts may give Bank of England officials food for thought as they prepare to present new projections alongside an interest-rate decision tomorrow.

Bloomberg

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