Sterling might fall 20% if UK leaves European Union, NIESR says

A decision to leave the European Union would result in a “significant shock” to Britain’s economy, one of the country’s leading think-tanks said, leading to an immediate and sharp depreciation in sterling and braking economic growth in 2017.

Brexit could be expected to lead to a 20% drop in the value of the pound against a basket of currencies, push the consumer price index higher by 2.0 to 4.0 percentage points and cut the rate of growth of domestic product in 2017 by 0.8 percentage points to 1.9% from where it would be otherwise, the National Institute of Economic and Social Research said in a statement.

Once the follow-up negotiations were concluded the short-run influences would dissipate, but in their place would come long-run falls in trade and foreign direct investment – alongside a potential hit to productivity.

NIESR ran simulations encompassing the four possible scenarios which follow Brexit, including retaining access to the EU along the lines of Norway (EEA membership), Switzerland (bilateral agreements), WTO (no free trade agreement with the EU) and WTO+ (no free trade agreement with the EU, and a -5per cent productivity shock).

Under all of those scenarios, demand for the UK’s exports would drop by between 10% and 29% and higher import prices would ensue, sending sterling to around parity with the euro.

By 2030, consumption would be between 2.4% and 9.2% weaker than if the UK had remained inside the EU.

That would translate into declines in annual consumption per capita of between £500 and £2,000 (at 2012 prices) by 2030, the think-tank said.

Unemployment however would not be perceptibly higher by then, thanks to the UK’s flexible labour market - which means that real wages would bear the brunt of the adjustment.

“By 2030, we estimate that real consumer wages would be between 2.2 per cent and 7.0 per cent lower outside the EU than they would be remaining in the EU. “