Economists at the Treasury, the OECD and the IMF were “overly pessimistic” about the impact of Brexit on the British economy, according to academics from the University of Cambridge and Ulster University.
The Treasury’s “gravity models” over-emphasise the importance of UK exports to the EU because they use Europe-wide averages which include much smaller countries, said the paper, published by Policy Exchange, a think tank closely associated with the government of former Prime Minister David Cameron.
Predictions of the long-term effect on the economy from major forecasters after Brexit ranged from a 2.5 per cent hit to GDP to a 9.5 per cent crash if the UK defaulted to World Trade Organisation (WTO) rules for trade after Brexit. The Treasury estimated trade in goods is 115 per cent higher than it would be were the UK not in the EU, but that finding is too high, the paper’s authors said.
Graham Gudgin, a University of Cambridge economist and Policy Exchange’s chief economics adviser and the co-author of the report, said: “The Treasury’s models did not take into account that not all economies are created equal and the UK is a significantly larger and stronger economy than many of the smaller countries which were given equal weight in the model.”
The Treasury and the Organisation for Economic Co-operation and Development (OECD) both estimated the average potential trade loss across all 28 EU members, without taking into account the different trading relationship of the UK. Gudgin’s analysis, which has previously been disputed by other economists, puts the loss of UK goods trade at 23 per cent.
He said: “The overall conclusion is that the effect of leaving the EU on economic growth, while negative, will be small, and any associated knock-on impacts will similarly not be large.”
During the Brexit campaign the Treasury’s central estimate said British families would be £4,300 worse off on average after 15 years, equivalent to a 6.2 per cent hit to GDP.
That analysis, commissioned by former chancellor George Osborne, was roundly criticised across the political spectrum and labelled as "Project Fear".
Significant doubt will remain on the longer-term effects of Brexit until long after the UK has officially left the EU, although there are some signs the shape of the UK economy may be undergoing changes.
Order books at manufacturing exporters have surged as the devalued pound has boosted the attractiveness of products priced in sterling for foreigners. However, higher inflation also threatens to weigh on growth, which has been led by consumption over the past year.