EU referendum: Brexit will cost six per cent of GDP, says Economist Intelligence Unit

 
James Nickerson
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The reality will sink in in 2019-20 (Source: Getty)

If the UK votes for Brexit the country's economy will be plunged into uncertainty, resulting in a cost of six per cent of GDP, according to new research.

Research from the Economist Intelligence Unit forecasts that in the first instance there will be tumultuous financial market volatility, followed by a "swift impact on the real economy with households and businesses reining in their spending until the dust settles".

The research joins the likes of the Treasury, International Monetary Fund and Bank of England in predicting a negative economic shock from a Brexit vote.

Specifically, there would be a sell-off in UK assets and a depreciation of the pound, with yields increasing, consumer confidence slumping and companies delaying investment and hiring decisions.

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The government would act swiftly to alleviate uncertainty, formally notifying the EU of its intent to withdraw and laying out to the public the broad pillars of the trade agreement that it will seek with the EU, the EIU said.

But unfortunately, while that negotiating is all going on, the economy would be experiencing the deepening second-round effects of the vote. The weaker pound would lead to rising import costs, but that won't cause inflation to rise too much due to the weak demand environment.

What does that mean? Squeezed profit margins and potential layoffs. Unemployment would climb in 2017, peaking at six per cent in 2018.

Precautionary savings would then rise, with the cocktail of negative effects causing a domestic demand slump, such that the greatest hit to the economy resulting from a vote to leave the EU would be felt in 2017.

It's not until 2019-20 that the "reality of Brexit" would sink in. The final deal by the government will be reached in 2018, as under Article 50 of the Lisbon Treaty a country has two years to negotiate exit from the EU.

So in 2019 the new relationship is settled. Uncertainty is over, but by this point real GDP is six per cent lower.

Read more: Will leaving the European Union lead to more sovereignty for the UK?

The analysis comes as speculation that the Remain camp has won the economic argument has pushed Leave to focus on the issue of immigration.

This week Boris Johnson, Michael Gove and others said they want an Australian-style points-based system for immigration that would be more "humane".

However, Nick Clegg, who is pro-Remain, has said that the debate has shown that leaving the EU will not lead to a reduction in immigration.

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