The IMF lays out the grave consequences of Brexit

AS IF the economic evidence against Brexit were not already strong enough, the IMF has today published an analysis which shows just what a hit Brexit would be to the British economy. It is an even-handed piece of work, but probably still underestimates the economic costs of quitting the European Union.

The IMF wonks open on a cautious note: in the studies on the economic impact of Brexit “the range of estimates is large, and a few studies even suggest the possibility of positive net economic benefits.” The paper then sets about discrediting pro-Brexit economic studies in typically subtle IMF-speak. One such study suggests unilateral abolition of import tariffs following a Leave vote, which will supposedly yield a 4% boost to GDP as trade soars. The fund, though, thinks it unlikely that “it would be feasible to reduce [tariffs] to zero”. Rather, in a post-Brexit, more inward-looking country, “domestic political pressures may cause import tariffs to rise.”

Even if it were possible to blow away all tariffs, the IMF staff reckon that a likely permanent depreciation could “completely offset” the impact of such a move. The benefit Britain would get from buying more stuff tariff-free would be outweighed by getting less for a weak pound.

The IMF then looks at two future scenarios. In the first, Britain quickly agrees a new trade deal with the EU; in the second, the negotiations are more protracted and Britain eventually settles for basic World Trade Organisation rules.

In the first scenario, sterling depreciates by 5%. GDP growth slips to 1.4% in 2017 and unemployment rises slightly. However, the second scenario, in which negotiations proceed slowly, is much more likely to come to pass; few officials believe that Britain would secure a trade deal quickly. That means financial services, which rely on “passporting” rules to export to the EU, will suffer, as will the pharmaceutical industry, which relies on similar arrangements. The level of economic uncertainty will be much the same as that experienced during the global financial crisis, limiting investment and consumer spending.

In the second scenario, Britain falls into recession next year. Unemployment hits about 7% by 2018, up from around 5% now (during the financial crisis it peaked at 8.5%). Real wages will stagnate, mainly because of high inflation. Surprisingly, Britain’s trade balance will move into a small surplus, thanks not to the dynamism of exporters but “because demand for imported goods plunges due to exchange-rate depreciation and reduced consumption”. All in all, the IMF’s forecast leans towards the scary end of the spectrum of recent studies.