How Bad is a 'No Deal Brexit' Likely to Be?

Michael Nower PhD Candidate

Michael Nower is a 3rd year PhD Candidate at the Centre for Banking, Institutions and Development and supervised by Dr Anamaria Nicolae at Durham University Business School. Below, he shares findings from his research on the possible impact of a 'No Deal' Brexit.

In the event of a ‘No Deal’ Brexit, the impact on the UK economy in the short run is likely to be extremely large. The research undertaken at Durham University Business School shows that over the first year after the ‘No Deal’ Brexit, UK GDP is expected to fall by over 10% relative to its pre-Brexit level. For comparison, the fall in UK GDP during the Great Recession was approximately 4.2%. This large decrease in UK GDP is driven by the disruption to both UK trade with the EU and UK trade with the non-EU countries with which the EU has existing Free Trade Agreements (FTAs).

In the long run, the impact of ‘No Deal’ is much more uncertain, as by leaving the European Union Customs Union and the European Single Market, the UK does regain the ability to sign its own FTAs.

If, after the ‘No Deal’ Brexit the UK is able to secure a comprehensive FTA with the EU, and at the same time is able to negotiate tailored FTAs with non-EU countries, it is possible for long run UK GDP to be higher than if the UK remained in the EU. However, these FTAs would not dampen the substantial short-run impact of a ‘No Deal’ Brexit.

As UK trade is disrupted, there will be a significant decrease in UK productivity and real wages, as exporting firms will cut their employment and workers are forced to move into less productive jobs. However, it is possible for the UK government to reduce at least some of the short-run impact of a ‘No Deal’ Brexit through temporary unilateral recognition of EU product standards and a temporary unilateral reduction in import tariffs to zero, but these policies would not completely eliminate the short run hit to UK GDP.

It is clear therefore, that although in the short run a ‘No Deal’ Brexit is likely to cause a significant reduction in UK GDP, the long-run picture is less certain. The long-run impact is entirely dependent on the future shape of the UK’s trading relationship with both the EU and, more importantly with non-EU countries, given the projected shift of global GDP away from the EU and US and towards quickly developing countries such as China and India.

To find out more about Durham University Business School's research on Brexit, please visit the following link: www.dur.ac.uk/business/research/economics/cbid/brexit/