World Economy

Brexit Would Hurt UK-EU Trade

Brexit Would Hurt UK-EU Trade Brexit Would Hurt UK-EU Trade

Britain's economy would be worse off if voters decided that the country should leave the European Union, according to an overwhelming majority of economists polled by Reuters. The economists also gave the so-called 'Brexit' a 40% chance of seeing the light of day.

All but one of 28 economists in the poll taken last week said Britain would take a hit if the vote–which could take place by June–meant exiting the EU. The sole dissenter said the UK economy would be unmoved, not better off.

Arguments about the economy are central to the debate. Supporters of Britain leaving the EU say companies would be less bound by red tape; the country would be able to strike its own free trade deals; and its existing EU partners would not want to hurt bilateral trade.

But analysts at some of the world's biggest banks said an exit could shrink Britain's economy by as much as 2% over the next couple of years and would probably take as much as 10 percentage points off GDP over the next decade.

Most of the mainly UK-based market and academic economists polled expected trade to worsen, with Britain struggling to negotiate a favorable trade deal with its former EU partners, should it choose to renounce its membership of the world's largest trading bloc.

Risks Ahead

Against this backdrop, a slim majority of economists see Britain's hefty current account deficit widening, underscoring a risk highlighted by the Bank of England.

Britain has been among the fastest-growing rich economies in recent years.

But economists worry that an exit from the EU could hurt its prospects if exporters were to face higher barriers, a weaker pound made imports more expensive and uncertainty over the shape of a post-EU Britain curbed investment.

"A Brexit outcome will make me more pessimistic for our growth prospects in the second half of 2016 and the medium term," Costas Milas, professor of finance at the University of Liverpool, said.

He said it would trigger "huge" investor uncertainty and make it more expensive for the government to sell British debt.

"This higher yield will add to the cost of borrowing that companies face and will delay their investment decisions."

As well as the risk of Britain losing its unfettered access to its biggest trading partner, its companies might find it harder to tap into the pool of potential employees in the rest of the EU to fill their vacancies.

Britain could also end up outside an area that accounts for just under a third of the value of all cross-border investment.

Even though some analysts said an exit could prompt a fall in sterling and make British exports more attractive abroad, 23 out of 28 economists expected it to hurt British trade, while 15 said Britain's current account deficit could widen.


Uncertainty could also prompt the Bank of England to wait until the outcome of the referendum to move on interest rates.

Out of the 28 economists polled, 21 expected the BoE to hold off raising interest rates until after the vote, just as more costly imports put upward pressure on inflation.

Inflation has hovered near zero for months and wage growth is slowing, which, together with a weak global economy, have made the BoE reluctant to deliver its first hike in nearly a decade.

But a sharp depreciation in sterling post-Brexit and a rise in import prices could see the BoE rushing to move rates higher.

Public opinion polls on the EU referendum question give a confused picture. Polls done by telephone suggest the 'in' camp is ahead by a double-digit margin, while online polls instead predict a tight race that the 'out' camp could win.