What does Sadiq Khan’s Brexit report say?
A no-deal Brexit would leave Britain’s economy diminished and its people poorer. That is the conclusion of the economic forecast commissioned by the mayor of London, Sadiq Khan from Cambridge Econometrics. It’s not the first report to argue that crashing out of the European Union would be bad for business, but it is one of the most comprehensive and draws on a wide range of existing studies. It concludes: “The more severe the type of Brexit, the greater the negative impact will be on the UK.”
What do the Brexit numbers tell us?
By 2030, Britain’s national income, using the measure gross value added, which approximates to GDP, will be 3% lower should the UK crash out of the EU without a transition deal or any form of trade agreement. It’s not better under what the report’s authors call scenario four, which allows for a transition deal, when the loss of GDP will be 2.7%. Scenario one allows for full membership of the single market and customs union and is considered to be equivalent to the status quo while scenarios two and three are based on membership of one or the other.
Whichever path is adopted, from two to five, there will be a long slow slide in GDP compared to current forecasts. It won’t replicate the collapse that the economy experienced in the wake of the 2008 financial crash, but there will be a cumulative loss that will be huge nonetheless, the report says.
Do the numbers stack up?
As a piece of future gazing and guesstimating, it is much more circumspect than the Treasury’s pre-referendum vote warnings. The Treasury, under George Osborne chancellorship, predicted that voting for Brexit would cost every household £4,300 or 6% of GDP. It was considered by many to be exaggerated scaremongering that forecast a dive in trade with the rest of the EU.
There are still plenty of assumptions in the Cambridge forecast, including the way trade with the rest of the world will be affected, how much the size of the working population will decline and whether a decade of low productivity will come to an end.
What is the worst outcome?
A breakdown of the impact from crashing out of the EU with no transition or final deal shows that there will be over half a million fewer jobs than previously expected and nearly £50bn in investment lost by 2030. Trade with the rest of the world will be down, and not just trade with our neighbours.
The London School of Economics has showed how changes in tariffs and regulations can change the level of imports and exports. The Cambridge study used this study, but ditched widely held economic law, known as the gravity model, that argues countries trade with their neighbours first and foremost, in favour of simple cause and effect of trade barriers on current business relationships. This it hopes, provides a more realistic and less theoretical basis for arguing that trade links with Europe will suffer badly outside the single market and customs union.
Is there a regional bias?
The analysis by Cambridge Econometrics predicts that a no-deal Brexit could mean London loses as many as 87,000 jobs, with the capital’s economic output 2% lower in 2030 than what would be expected under a soft Brexit.
Ben Gardiner, one of the authors of the Cambridge report, said previous reports had found that London was one of the worst affected due to its strong connections with the continent and dependence on finance and an international labour force.
“But our analysis shows that London is one of the most resilient economies in the UK,” he said. “Not only has it increased its share of the UK’s GDP over many years, gaining in importance, it has shown itself to be very resilient and robust with a young and flexible workforce that bounces back strongly from any upsets.”
That leaves the north-east and Midlands, which export more goods per head of population, to suffer the most from a no-deal Brexit.
Is there a silver lining?
There could be the Japan-ification of the UK economy. The report expects all parts of the UK economy to shrink over the next 12 years from trade and investment to employment and government revenues. But with the population also expected to fall significantly from current official projections, the number of people in the country needing jobs and government services will be lower, allowing for only marginal falls in GDP per head.
In Japan, GDP has remained largely static for two decades and yet the population has remained largely satisfied. This follows a decline in the population that means GDP per head increases.
Another silver lining could be that trade with other parts of the world takes off in defiance of current economic models. That is the basis of studies by the Economists for Brexit group, which have argued that UK firms, freed from stifling EU regulations, would find they can expand the number of export destinations for their goods and services.
