Brexit will be a bigger disaster than expected

If there were a top three of the most intriguing economic questions of today, it would certainly include 'what will be the economic damage of Brexit'. Researchers at the prestigious MIT Sloan School of Management in the United States believe they know.

They looked at the expected impact of Britain's exit from the EU and thus the common market on economic growth in the country. The models that the scientists have worked with show that Brexit is

can lead to a loss of growth of up to 10 percent. That is about four times more than current studies have indicated.

The researchers at MIT say the split between the EU and the UK will increase the cost of trade between them, meaning less trade and less foreign investment in the UK. And that, they argue, inevitably leads to lower productivity, lower incomes and thus lower economic growth.

Of course, Brexit means that the money that London now pays to Brussels will remain in its own country, but, according to the MIT researchers, that amount is insignificant compared to the costs the country has to deal with.

There are two important caveats to these results. The first is a common one, namely that, despite the use of very impressive economic models, it is ultimately all guesswork. Reality will have to show whether long-term damage will occur and if so, how high it will be or whether the British economy will indeed be hit by Brexit.

The other important caveat is that there is an appearance of bias in the US investigation. The professor who led the research is John van Reenen, someone who has campaigned against Brexit. His preference means that we have to take into account that the research method and therefore the results have not been completely value-free.

It is a non-argument that the British economy has fared much better than expected since the referendum at the end of June last year. The negative consequences of Brexit must come in handy. One of the immediate consequences was a sharply weaker pound, something that actually benefits economic growth in the short term and only brings the acidity at a later stage, for example in the form of higher inflation and all the costs that come with it. such as rising wage costs and higher interest rates. It takes a while for a weak currency to lead to higher inflation.

The fact that the growth of the British economy in recent months has largely been driven by domestic consumption is also bad news. This means that when inflation has risen further and shopping for the British becomes noticeably more expensive, that engine can just stall.

In that light, I am not surprised that the British central bank, led by Mark Carney, is forecasting lower growth for this year. But who will be right on his side, Carney or Van Reenen, time will tell.  

Edin Mujagic

Edin Mujagić is an economist and manager at Beleggingsfonds Hoofbosch. He focuses on global central banks, and in his blogs he writes mainly about developments in interest rates and inflation. He has also written several books.

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