18 September 2018

Many forecasts of the consequences of a no deal Brexit have concentrated on the longer-term ‘big picture’. Gemma Tetlow applauds the IMF for pointing out how disruptive it could be in the short term unless softened by a number of side deals.

The International Monetary Fund's (IMF) latest assessment of the UK economy echoes what Bank of England governor Mark Carney reportedly told the Cabinet: a no deal Brexit would seriously disrupt the UK economy. This contrasts markedly with Jacob Rees-Mogg’s statement – echoed in newspapers, such as the Express and the Telegraph – that there was “nothing to fear” from a no deal scenario. Rees-Mogg backed up his reassurance by presenting new research, which says UK economic output could be boosted by 7% (or £1.1 trillion over 15 years) by trading with the EU under World Trade Organization (WTO) rules rather than trying to reach a special agreement with the bloc.

But like many other economic forecasts, the focus of that report – which was produced by the Economists for Free Trade group – was mainly on the long-term economic impact. Those projections have been criticised on many fronts and are out of line with other economic projections, which suggest trading on WTO terms or adopting unilateral free trade would reduce – not enhance – UK economic growth. But there are particular reasons for taking note of the IMF's warning. 

It all depends on what you mean by no deal. The forecasts from the Economists for Free Trade did not actually model the short-run impact of no deal – that is, walking away without any sort of agreement. In attempting to project what would happen to the economy if there was no “trade deal” between the EU and UK, the Economists for Free Trade assume that there would be no trade deal but that deals would be struck in other areas, such as aviation, customs co-operation and nuclear safety.

The Economists for Free Trade assume there will be other deals

The text of their document outlining a so-called World Trade Deal makes this clear: “Contrary to simplistic remarks from some government ministers and the Remainer media, a World Trade Deal only implies that there will not be an EU trade deal – not that there will be no deal on anything at all.” The Economists for Free Trade are right to point out that no major trading partner trades with the EU without such side deals – but agreeing such side deals requires cross-border co-operation and they take no account of the circumstances where talks on withdrawal break down.

But the IMF, on the other hand, assumes that no deal really does mean no deal – as opposed to “lots of other deals”. As Michel Barnier made clear to the Exiting the EU Committee on its most recent visit to Brussels: “if there is a no deal, there is no more discussion. There is no more negotiation...each side will take its own unilateral contingency measures…but this does not mean mini-deals in the case of a no deal.”

The IMF’s report highlights the problems that could occur if the EU was to stick to that line. It highlights the “daunting” challenges facing the UK Government in preparing for Brexit in the “limited time” that remains – a very similar assessment to the Institute’s. These range from the need to establish domestic agencies to replace EU ones, to the need to renegotiate hundreds of bilateral and multilateral international agreements that the UK currently benefits from as an EU member.

The IMF’s central forecast for UK economic growth assumes that the UK and EU reach a broad agreement on their future relations by the end of 2018, which allows a transition and the new relationship to be in place by January 2021. But it warned that “a more disruptive departure”, with the UK and EU failing to reach such a broad agreement, “could lead to a significantly worse outcome, especially if it were to occur without an implementation period”. 

It is the assumptions underlying the forecasts that matter

The big difference in these two assessments lies in the assumptions they make. Next month the Institute for Government will publish a paper examining what drives the different conclusions in different economic models of the impact of Brexit and the weight of evidence to support them. But – contrary to the way they have been presented in some parts of the media – those projections provide little guide to the short-term impact of the UK Government walking away from talks with the EU with no deal at all.

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At last! An article that articulates the ramifications of no deal, full stop. Thank you!