“I think there is a false confidence that there’s a fall back.”
One of the reasons the WTO model is considered the worst possible outcome for the UK is its tariff structure. Tariffs average around 5 per cent over a broad range of goods, but have important variations, including a near 10 per cent tariff on cars, according to Axa Investment Management.
David Page, senior economist at Axa IM, sets out: “When HM Treasury made its long-term assessment of the impact of Brexit on the economy, it estimated the likely economic cost to the UK in the case of a negotiated bilateral deal to be 4.6-7.8 per cent of GDP.
“However, if the UK adopted a WTO trading relationship with the EU it estimated the cost to rise to 5.4-9.5 per cent of GDP.”
Single market or no single market?
Edward Smith, asset allocation strategist at Rathbones, says the shape of the UK economy after Brexit depends on two things:
- Whether the UK retains any access to the single market programme.
- What happens to the EU project without the UK.
He explains: “If the EU completes the single market – removing the final barriers to trade and investment – then it is much more likely that capital will be reallocated from the UK towards the mainland than if further progress in the EU project stalls.
“If the UK is shut out from the European Single Market and new trade deals are slow to come by, the productivity of the tradeable sectors of the economy, particularly financial services, are likely to undergo a profound period of stagnation.”
He acknowledges both of these outcomes are big ‘ifs’ and even in this worst case scenario the effects will take time to be felt, rather than feeling like an “overnight collapse”.
In a situation where the government’s Brexit committee has not been able to negotiate a deal for the UK by the deadline, is it likely there will be increased market volatility?
“I think long before that it would have become obvious there was not going to be an arrangement and there would be further weakness of the pound but also potentially expectations of quite a lot of economic disruption,” Ms Flanders suggests.
However, she thinks this should not be considered the more likely development.
“But on the basis of how the early skirmishes have gone with Brussels you can’t rule it out at all. You’d still think there was a chance of that happening that was really too high for comfort, maybe 15-20 per cent,” she adds.
