Estimates of the economic effects of no-deal on GDP are varied

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APART FROM Economists for Free Trade (EFT), a pro-Brexit group, almost no wonks believe that leaving the EU without a deal would be good for the economy. The majority flinch when Boris Johnson, the new prime minister, promises that Britain will push off by October 31st “come what may”. Yet the question of just how bad a no-deal Brexit would be has many answers.
On July 18th the Office for Budget Responsibility (OBR), the fiscal watchdog, warned that a no-deal exit would “push the economy into recession”. The next day Oxford Economics argued that “no-deal Brexit might be bad, but not OBR bad.” Capital Economics, another consultancy, wrote last year that in its central no-deal scenario “we don’t expect…a full-blown recession.” Estimates of the long-term effect on GDP are even more varied (see chart).
If Britain leaves without a deal it will become a member of the World Trade Organisation on its own, not as part of the EU. Britain would generally have to charge the same tariffs on EU imports as on non-EU ones. Regulations governing everything from medicines to electricity connections to financial services could lapse.



Three big judgments shape economists’ views of the eventual impact of this. The first is precisely what happens to tariffs. The EFT assumes that Britain unilaterally cuts all of them to zero, boosting trade and thus economic growth. Most economists think that too optimistic.
The second issue is what happens to non-tariff barriers, such as regulations, between Britain and its trading partners. Plenty of academic work looks at the economic impact of entering a big trading bloc, but there is much less on countries leaving, since this rarely happens. Will the non-tariff barriers that were lowered during Britain’s membership of the EU rise again when it pushes off? The government estimate shown in the chart assumes that the majority will be. Others, including from Rabobank, use estimates of non-tariff barriers between the EU and America as a guide to what Britain could face.
The third judgment concerns so-called “dynamic effects”. Economists often assume that a reduction in openness to trade will crimp long-term productivity growth, in part because specialisation is more difficult and in part because inward investment from abroad would be lower. One paper from the London School of Economics, which looks at the impact of Britain moving to WTO rules, finds that including these dynamic effects triples the estimate of lost GDP per person.

Brexiteers argue that most economists are too negative—just as they were about the impact of the vote to leave the EU in 2016. Following a chaotic exit, the Bank of England could radically loosen monetary policy, and the government could ramp up spending or slash taxes. Perhaps. But even the gloomiest economic forecasts only paint a partial picture of what could happen following a chaotic exit. Shortages of medicines, violence at the Irish border, shuttered farms and panicky immigrants might not affect the economy much. But there is more to life than GDP. ■

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