Photographer: Chris Ratcliffe/Bloomberg

New U.K. Trade Deals Can’t Soften Blow From Brexit, Niesr Says

  • Trade with emerging, Anglo-American nations would be "small"
  • EU single market more effective at cutting non-tariff barriers

New U.K. free trade agreements with non-European Union nations won’t come close to offsetting the impact of leaving the EU, according to the National Institute of Economic and Social Research.

Based on the structure of existing deals between 42 countries, the benefits of an agreement with the U.S., Canada, Australia and New Zealand, or with Brazil, Russia, India, Indonesia, China and South Africa, would be “very small compared with the costs from leaving the EU single market,” London-based Niesr said in a report.

While the institute predicts that leaving the single market could lead to a long-term reduction in total U.K. trade of 22-30 percent, it sees the increased trade resulting from new deals equaling just 2.2 percent and 2.6 percent. The findings, which were initially published in a Jan. 27 blog, forecast no upswing at all in services trade -- which accounts for the majority of the U.K.’s economic activity.

“This stark difference mainly reflects the fact that the single market is a very deep and comprehensive trade agreement aimed at reducing non-tariff barriers, while most non-EU free-trade agreements seem to be quite ineffective” at doing so, economists Monique Ebell and James Warren wrote. “If the U.K. is to replace the lost trade from leaving the single market, it will need to negotiate trade deals that are much more effective,” especially for services.

U.K. Forecasts

In its report published on Wednesday, Niesr also raised its 2017 U.K. growth projection to 1.7 percent from 1.4 percent and cut its 2018 forecast to 1.9 percent from 2.2 percent. It kept its 2016 estimate at 2 percent. It sees consumer-price inflation accelerating to 3.3 percent this year, with a peak of 3.7 percent toward the end of 2017.

The Bank of England will probably lift its own near-term growth and inflation estimates on Thursday, which will be published alongside its interest-rate announcement. At the same time, policy makers may highlight potential longer-term threats from Brexit that could damp any speculation about tighter policy as prices climb through the central bank’s 2 percent target.

Niesr said it sees the BOE looking through the “temporary spike” in inflation and keeping interest rates at a record-low 0.25 percent until the second half of 2019.

The squeeze from inflation alongside other factors could also widen inequality, according to a report by the Resolution Foundation published Wednesday. The issue has played an important role in the political debate after Brexit, which highlighted wealth disparity as a problem in a divided country where many people feel left behind.

Disposable income of poorer households in the U.K. is set to fall over the coming years, the think-tank said. Rising price growth, stagnation in wages and welfare cuts will mean that income growth for the bottom half of households will fall by 2 percent while the richest half are set to enjoy gains of around 7 percent in the same period.

If these predictions materialize, the resulting rise in inequality under the current U.K. government would be the worst since Margaret Thatcher was prime minister in the 1980s, the report said.

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