UK economy will suffer more than EU in ‘no deal’ Brexit scenario, warns IMF

The UK economy would suffer more than the EU in the event of a “no deal” Brexit, new research from the International Monetary Fund shows.

A new modelling exercise from the IMF, which factors in disruption to corporate supply chains, suggests that the EU economy could take a hit of up to 1.5 per cent of GDP over the long term if the UK leaves the EU without any kind of trade deal and only trades on bare World Trade Organisation terms.

That compares to a roughly 4 per cent of GDP hit for the UK.

The Washington-based organisation noted that other estimates of the long term economic damage to the UK from a no deal Brexit were also high.

The OECD estimated before the referendum that a WTO Brexit could cost the UK up to 5.1 per cent of GDP over 15 years. A study by the London School of Economics estimated a 9.5 per cent hit.

And the government’s own leaked internal analysis of a WTO Brexit estimated a GDP loss of up to 10.3 per cent.

“Similar to various empirical studies, we find that the estimated long-term output and employment losses (in per cent) for the EU27 in our study are on average lower than the corresponding losses for the UK estimated in the literature,” it said.

Many Brexiteers have sought to argue that the EU has more to lose by failing to do a new trade deal with the UK than Britain.

On Wednesday the international trade secretary, Liam Fox, stressed the pain likely to be felt by countries such as Ireland, Belgium and the Netherlands.

The IMF estimates that the damage to the EU in the event of a free trade deal Brexit could be limited to 0.8 per cent of GDP, while a Brexit in which the UK remains in the single market would have a negligible economic cost.

A WTO Brexit is estimated to hit EU employment over the long term by around 0.7 per cent. A free trade deal would reduce it by 0.3 per cent.

However, the IMF study does confirm that Ireland, which has extensive trade links with the UK, would be almost as severely impacted by a WTO Brexit as the UK.

The government’s recent White Paper on the post-transition UK trade arrangements proposes a new form of customs arrangement with the EU and the UK retaining a “common rule book” with that of the EU’s single market.

Jonathan Portes of King’s College London, referencing the government’s internal scenario analysis, has estimated that, if implemented, this arrangement would still cost the UK 3 per cent of GDP over 15 years.

“There will be no winners from Brexit. Integration between the EU and the United Kingdom has strengthened significantly over time, reflecting shared gains from the EU single market,” concludes the IMF’s report.

The IMF’s modelling is of the costs to economic dynamism stemming from less trade and cross-border investment, rather than the short-term damage of the UK crashing out of the single market with no divorce agreement, which would likely be extremely severe.

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