Watch: Keith Wade on the economic impact of Brexit

How is the UK's exit from the EU going to impact its economic prospects, and what will the knock-on effects be on Europe and the rest of the world?

15 July 2016

Keith Wade

Keith Wade

Chief Economist & Strategist

Brexit will have a major impact on the UK economy; we expect it to slow GDP growth down, such that next year our forecast for GDP growth has now been reduced from 1.6 to 0.8%.

With the appointment of the new Prime Minister Theresa May, the uncertainty is beginning to lift a little. This means we will be able to get a negotiating position on trade and we will be able to define a policy on migration.

However, it will take some time to put a deal together. The longer it takes, the more the uncertainty will last, and the more we are likely to see weakness in investment spending in the UK.

The willingness of people to invest and do business in the UK is clearly going to be impacted by the kind of trade deal that they expect to have in the future.

The process is probably going to be held up by the fact that there are elections in Germany and France next year which means that for 2017 I think negotiations will be very slow, and it may not be until 2018 that we really make some progress.

On top of that, the recent trade deal with Canada has meant that all 27 countries across the EU want to ratify that deal in their parliaments. So, again, once we have agreed a trade deal, we will then have to go through the process of waiting for ratification. It could take four or five years before we really know where we stand.

In terms of the rest of the world, the most directly impacted of course is the eurozone, which will experience weaker trade. But the real concern is that we see lots of other referenda. Indeed, Hungary has now announced it’s going to have a referendum on migration.

One challenge is whether or not the core countries in Europe can reassure the peripheral countries that the EU is still going to hold together.

I think there are a couple of tests for that. The first one is in Italy and whether it will be allowed to bail out its banks, and that will help to solve their banking crisis. There is a referendum on the constitution later on in October, and if that goes wrong then we could see the fall of the government.

The other important test will be whether or not the fiscal compact, the excessive deficit procedure, is implemented. Spain and Portugal have exceeded their budget deficit targets and under the EU rules they would be due to be fined. We would expect the EU to waive those rules in these circumstances.

Looking at the world economy more generally, the impact of Brexit is not that great.

It is worth remembering that the UK only accounts for about 4% of global GDP and so a big slowdown or a recession in the UK is not going to sink the rest of the world. In addition,rate cuts from central banks around the world will help to support economic activity.

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