The Macro-Economic Impact of Brexit: Using the CBR Macro-Economic Model of the UK Economy (UKMOD)

This working paper uses the new CBR macro-economic model of the UK economy to investigate possible futures following the referendum decision to leave the EU. The paper briefly explains why we felt the necessity to build a new model and describes some of its key features. Since Brexit is a unique event with no precedent it is not possible to do a normal forecast in which a few assumptions are made about a limited range of exogenous variables. The best that can be done is to construct scenarios and two are presented here. The difficult part is to decide what scale of adjustment is needed to reflect the likely realities of Brexit. Analysis by HM Treasury of the potential impact of various outcomes for trade outside the EU is examined and found wanting. Instead the actual experience of UK export performance is examined for a long period including both pre- and post- accession years. This suggests a more limited impact of EU membership. While we include a scenario based on Treasury assumptions, a more realistic, although in our view still pessimistic, scenario assumes half of the trade loss of the Treasury. The results are presented through comparing these scenarios with a pre-referendum forecast. In the milder Brexit scenario there is a two per cent loss of GDP by 2025 but little loss of per capita GDP, less unemployment but more inflation. In the more severe, Treasury-based scenario the loss of GDP is nearer five per cent (two per cent for per capita GDP), inflation is higher and the advantage in unemployment less.