Brexit May Spark Yearlong Recession in Starkest U.K. Warning

  • Treasury forecasts 520,000 job losses, 3.6% Hit to GDP
  • Report is ‘categorically unfair and biased:’ Duncan Smith

How Reliable Are Brexit Forecasts?

The U.K. government issued its starkest warning yet about the dangers of a vote to leave the European Union in next month’s referendum, saying it risks causing a yearlong recession, sparking a decline in the pound and costing hundreds of thousands of jobs.

QuickTake Will Britain Leave the EU?

Gross domestic product in 2018 would be 3.6 percentage points lower than the current forecast, which is for a 4.3 percent increase, the Treasury said Monday in a document assessing the short-term economic consequences of a so-called Brexit. That’s under a “shock scenario” that the Treasury described as “cautious.” Under a “severe shock” scenario, GDP would be 6 percentage points lower than otherwise, and house prices would fall about 10 percent from current levels.

“With exactly one month to go to the referendum, the British people must ask themselves this question: can we knowingly vote for a recession?” Chancellor of the Exchequer George Osborne said in a speech at the headquarters of home-improvement chain B&Q in Eastleigh, southern England. “Does Britain really want this DIY recession?”

Political Careers

The chancellor was flanked by Prime Minister David Cameron. With the Conservative Party split down the middle and both men’s careers on the line, they are determined to emphasize the dangers of a vote to leave in the June 23 referendum. In November, Cameron offered a more optimistic view, saying that Britain was a “thriving country” and “whether we could be successful outside the European Union is not the question.”

While an analysis of the long-term impacts of Brexit published earlier in the month offered three scenarios, this one omitted the most optimistic, in which the U.K. retained its membership of the European Economic Area. The assessment is partly based on the assumption that after a vote to leave, people would adjust their expectations and spending in line with the Treasury’s own, pessimistic, forecast that they would be “permanently poorer.”

Iain Duncan Smith, who resigned as work and Pensions Secretary in March, accused the government of focusing only on the negatives. “They have today chosen only to produce the downside,” he said. “That makes this report categorically unfair and biased."

Better Capital LLP Chairman Jon Moulton, Energy Minister Andrea Leadsom and Capital Economics Executive Chairman Roger Bootle joined more than 30 economists, politicians and business leaders in signing a statement saying the Treasury has consistently got its forecasts wrong.

Scare Stories

“The real risk to the economy is to stay tied to the failing single currency with an obligation to pay its bills,” they wrote in the statement, e-mailed by the official Vote Leave campaign. “If we vote ‘Leave,’ we will substantially cut the current-account deficit and thus will be able to stabilize the economy. The same old scare stories simply don’t wash.”

Under the least severe of the two scenarios outlined in the Treasury analysis, the pound will fall by 12 percent in the two years following a vote to leave, pushing up annual household shopping bills by 220 pounds ($320) over the same period. About 520,000 jobs would be lost, real wages would decline by 2.8 percent and inflation would increase by 2.3 percentage points. Under the worse-case scenario, 820,000 jobs would be lost, real wages would decline by 4 percent and inflation would rise by 2.7 percentage points.

Finance Jobs

Not even that represented the most pessimistic scenario. If post-Brexit negotiations took more than two years to conclude, or if the outcome was less favorable than expected, the economy “could be subject to repeated and persistent rises in uncertainty which would depress further economic prospects,” according to the Treasury document.

The Treasury also warned that:

  • Tens of thousands of jobs in the financial sector will be at risk.
  • Corporate borrowing rates would rise by 130 to 200 basis points.
  • Term premium on 10-year government debt would rise by 40 to 100 basis points.
  • Public sector net debt would rise by 2.7 percent to 4.5 percent in the tax year ending in April, and by 4.5 percent to 8.1 percent a year later.


The Treasury said its latest analysis was reviewed by former BOE Deputy Governor Charlie Bean. It’s the department’s second in-depth study into the consequences of a Brexit, after saying last month that a vote to leave would cause decades of economic pain, knocking 6 percent off GDP by 2030.

Undecided Voters

The warning of recession echoes that given by Bank of England Governor Mark Carney earlier this month. Carney will testify to Parliament’s Treasury Committee on Tuesday.

The emphasis on risk is aimed at pushing undecided voters -- estimated in polls to make up as much as a quarter of the electorate -- into the “Remain” camp. Recent polling has suggested that the “Leave” side is losing ground. An Opinium poll published May 21 found “Remain” on 44 percent and “Leave”’ on 40 percent. The poll was conducted online, something that has tended to produce better results for “Leave.” Gambling website Betfair put the chance of Brexit at 22 percent. The Number Cruncher Politics site has the probability at about 18 percent, the lowest it’s been.

Cameron said on Sunday the referendum matters more than a general election.

A Brexit “is the self-destruct option,” Cameron said Monday. “The stakes couldn’t be higher, the risks couldn’t be greater, and in my view, the choice couldn’t be clearer. Leave Europe and put at risk what we’ve achieved. Stay in Europe and stay on the right track.”

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