Brexit would force Britain ‘back into recession’

Leaving the EU would plunge Britain back into recession, damage the country’s long-term growth potential and drive up government borrowing, Morgan Stanley has warned.

In a comprehensive review of the economic impact of an exit vote at the referendum, the American investment bank said that Britain would “flirt with recession” in the best case and collapse into a full-blown slump if there were difficulties in “resolving post-referendum uncertainties”, reports The Times.

To spur growth in the aftermath of an “out” vote, the Bank of England would hold interest rates steady for a year or even cut them and begin another round of quantitative easing, it said.

The government would be likely to abandon austerity as it adopted an “easier fiscal policy to support growth”.

“We think the Bank would be prepared to act if there were a disorderly and excessive weakening in sterling which posed a risk to wider financial stability,” Morgan Stanley said.

While recognising that there would be advantages to leaving — from an estimated £5 billion annual saving on EU contributions and “large gains for business from deregulation” to lower food prices outside the common agricultural policy — the economists found that “the costs of UK exit are more certain and the benefits are more speculative.”

Longer term, the UK would expect to see lower levels of immigration and reduced capital inflows outside the EU that would result in “a material reduction in potential growth”.

Morgan Stanley expects the UK economy to slow before the referendum as uncertainty in the build-up deters business from investing and triggers more household saving.

If the “outs” prevailed, the economy would come close to recession in the first three months of 2017 and growth for that year as a whole would tumble from Morgan Stanley’s present estimate of 2.3 per cent to 1 per cent. Share prices would fall up to 20 per cent and “house price growth might moderate”.

Whether the economy suffered a harsher fallout would depend on how negotiations with the remaining EU members played out. Anti-EU groups cite Switzerland’s bilateral trade deal as a template for an independent UK. However, Morgan Stanley noted that it took ten years to negotiate.

“We think there is a significant risk of a disorderly and costly exit,” the team said, because “remaining EU members may not want to make exit too painless”. That would “push the economy into recession”.