Rabobank: Hard Brexit to cost UK economy £400bn by 2030

• Leaving EU without a trade agreement could cost up to 18 per cent of UK GDP growth until 2030, compared to retaining EU membership

• Economic growth in the euro area to drop by 2 per cent by 2024 due to Brexit

• First study that integrally assesses the impact of Brexit on productivity, based on a UK-specific productivity model

The study uses macro-econometric modelling to assess the effects of the UK leaving the European Union in three possible scenarios –a hard Brexit where negotiations between the EU and UK do not lead to a trade agreement,– a free trade agreement (FTA), like that of Switzerland, and a soft Brexit where the UK remains part of the European internal market but exits the customs union. All three scenarios are benchmarked against a situation where the UK would continue to be a member of the EU (‘Bremain’). The study includes new elements compared to other studies and finds much larger effects.* 
A hard Brexit would cost the UK 18 per cent of GDP growth by 2030, compared to a situation where the UK would retain its EU membership. This equates to £11,500 per British worker. By comparison, negotiating a new free-trade agreement would cost the UK 12.5 per cent of GDP growth by 2030, and 10 per cent of GDP growth if the country was to undergo a soft Brexit. This equates to £9,500 and £7,500 per British worker respectively.

For countries in the euro area, a UK departure from the European Union – however severe – would result in a cumulative impact on EU GDP of – 2 per cent by 2024. The economic impact on the Netherlands, which was looked into specifically by the Netherlands-based research team, will be higher than on most other EU member states because it has a much closer trade relation with the UK, accruing losses of around €25bn and €35bn.

Immediate impacts of Brexit 
According to the Rabobank study, a hard Brexit outcome implemented in 2019 without a transition period would result in the UK economy immediately falling into a two-year recession period. For the FTA and the soft Brexit scenario there will also be a recession, but milder and much more short-lived. 
If negotiations in Brussels result in a hard Brexit, UK GDP is expected to decline by -2.4 per cent following its departure in 2019. However, if the UK and EU were to agree on a freetrade agreement, a GDP decline of -1.1% would be expected, and a -0.3 per cent decline in a soft Brexit scenario.

Fluctuating trade activity 
With the EU being the UK’s single most important trading partner, any ‘Brexit’ scenario would result in a slowdown of trade due to higher tariffs and custom controls. In the event of a hard Brexit, export volumes are estimated to be approximately 30 per cent lower than if the UK remained in the European Union, 15 per cent lower in a free trade agreement scenario and 10 per cent lower if the UK negotiates a soft Brexit. 
Import volumes would also be impacted, with a hard Brexit resulting in a 27 per cent decline in goods and services coming into the UK. The effect would be 23 per cent in the event of a free trade agreement and 16 per cent in a soft Brexit scenario.

Impact on the labour market 
The research shows an initial rise in unemployment figures, with a hard Brexit causing a jump from 4.6 per cent in 2018 to 6.2 per cent in 2020, but quickly returning to long term structural unemployment levels. In a Bremain scenario, Rabobank would anticipate unemployment to be stable, hovering at just above 4 per cent. In any Brexit scenario, long-term damage to the UK’s labour market is expected to be limited due to the dynamic nature of the UK labour market, with the research showing no indication that an exit from the European Union in any form will result in higher structural unemployment levels. 
However, the research shows that labour-augmented technological change is anticipated to stall in any Brexit scenario, which implies that technology advances will affect fewer jobs compared to if the UK remains in the European Union.

Hugo Erken, senior economist at Rabobank, said: “There has been extensive economic research into the immediate effects of Brexit, but they have largely focused on trade and investment, whereas implications of the different factors that affect productivity is only marginally or partially addressed.” “By looking at dynamics such as innovation, competition, knowledge and human capital, how they will change and what affects this will have on the structural makeup of the UK and European economy, our research shows that the long-lasting impact of Brexit is likely to be more severe than initially anticipated.” 
*Rabobank’s study uses an improved tariff version of the macro-econometric model NiGEM developed by NIESR, which does incorporate the negative impact of cost-push inflation on consumption resulting from imposed trade barriers between the UK and EU. They also estimate a unique total factor productivity model (TFP) for the UK, which assesses the specific impact on productivity caused by Brexit through determinants like innovation, competition, foreign knowledge and human capital.