HM Treasury analysis: The immediate economic impact of leaving the EU

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Series Details 9292
Publication Date 23/05/2016
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On the 23 May 2016 the United Kingdom's HM Treasury (Finance Ministry) issued a report on the short-term impact of leaving the European Union. This followed an earlier report issued in April 2016 on the long-term effects for the UK of withdrawing from the EU.

The report claimed that: ' A vote to leave would cause a profound economic shock creating instability and uncertainty which would be compounded by the complex and interdependent negotiations that would follow. The central conclusion of the analysis is that the effect of this profound shock would be to push the UK into recession and lead to a sharp rise in unemployment.

Two scenarios have been modelled to provide analysis of the adverse impact on the economy: a ‘shock’ to the economy, and a ‘severe shock’.

In the ‘shock’ scenario, a vote to leave would result in a recession, a spike in inflation and a rise in unemployment. After two years, the analysis shows that GDP would be around 3.6% lower in the shock scenario compared with a vote to remain. In this scenario, the fall in the value of the pound would be around 12%, and unemployment would increase by around 500,000, with all regions experiencing a rise in the number of people out of work.

In the ‘severe shock’ scenario, the rise in uncertainty, the effect on financial conditions and the transition effects are larger. The analysis shows that after two years the level of GDP would be 6% lower, the fall in the value of the pound would be 15% and unemployment would increase by around 800,000.

If negotiations with the EU took longer than two years to conclude or if the outcome were to be less favourable than expected, the UK economy could be subject to repeated and persistent rises in uncertainty which would depress further UK economic prospects'.

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