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#StrongerIn: IMF warns that even 1% drop in UK GDP would more than offset UK’s contribution to EU budget

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Christine_Lagarde_World_Economic_Forum_2013The IMF delivers more bad news for the Leave campaign. Their analysis says that the UK leaving the EU would "create uncertainty about the nature of the UK’s long-term economic relationship with the EU and the rest of the world". A day after the Bank of England’s Monetary Policy Committee minutes revealed that bank staff estimated that roughly half of the 9% fall in sterling since its November 2015 peak could be accounted for by risks associated with a vote to leave the European Union, the news is yet another blow for those arguing that the UK would be stronger out.

The IMF examines some of the possible economic effects of an exit from the EU. They predict a protracted period of heightened uncertainty, ‘leading to financial market volatility and a hit to output’. Apart from negotiating its exit from the EU, the UK could also look forward to renegotiating trading relationship with 60 non-EU economies (and prospective arrangements with another 67 countries that are in the works).

The IMF finds that the long-run effects on UK output and incomes would also likely be negative and substantial. Their assessment suggest that increase barriers would reduce trade, investment, and productivity. Estimated losses range from 1½ to as much as 9½% of GDP. Those who complain about the net contribution to the EU budget should bear in mind that a 1% drop in GDP would result in net fiscal losses for the UK that would more than offset the UK’s contribution to the EU budget.

Of course this is portrayed as a conspiracy by the Vote Leave campaign.

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Yes, George Osbourne, is on the Board of Governors of the IMF, the highest decision-making body of the IMF, but the board consists of one governor and one alternate governor for each member country. And I don't know what the EU's subs to the IMF are but, STOP THE PRESS..., everyone has to pay them.

The IMF outlined a number of other possible impacts.

Losing global financial centre status

It is anticipated that London would start to lose its status as a global financial centre, as UK-based firms may lose their “passporting” rights to provide financial services to the rest of the EU and it would almost certainly mean that euro-denominated business may over time move to other financial centres such as Frankfurt or Dublin.

Drops in equity and house prices

The IMF says that a Leave vote could provoke an abrupt reaction triggering sharp drops in equity prices, house prices and could even result in a sudden stop of investment inflows into key sectors, such as finance. While any benefits of an abrupt sterling depreciation this would only be partly offset by the hit to GDP from reduced consumption and investment, and inflation could also rise well above target for some time.

Contagion

While shooting itself in the foot, a Brexit could also result in contagion effects to regional and global markets, this would be unfortunate. Happily the IMF believe that the primary impact would be felt domestically, which seems only fair.

Evidence...

We don't even need to look at long-term forecasts. The IMF points to evidence that suggest that the EU Referendum has already had an impact on the UK’s economy with commercial real estate market, transactions plunging by about 40% in the first quarter of 2016. In financial markets, sterling has already depreciated by 9% in trade-weighted terms since November, the cost of insuring against a UK sovereign default has doubled (albeit from a low level), and the cost of insuring against exchange rate volatility around the time of the referendum has spiked.

Better safe than sorry

The IMF welcomes the decision of the Bank of England to hold additional liquidity auctions in the weeks around the referendum. Plans for additional medium-term budget consolidation may also need to be developed to offset the longer-run adverse fiscal effects.

EU Reporter is for Bremain, but let's have an honest argument. When you have the OECD, academia, business, Bank of England, the financial sector telling you that the Remain case wins the economic argument admit that you've definitely lost the argument. Casting aspersions at the independence of the Bank of England, OECD, IMF... is not argument, it is merely cant.

Read the report in full: IMF Article IV Report

 

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