Monday 23 May 2016 11:40 am

Brexit could cut sterling by 15 per cent and cost 800k jobs, says Treasury

By: Mark Sands

A vote to leave the European Union could see the UK's economy hit by a recession, a spike in inflation and a rise in unemployment, according to government figures.

While business secretary Sajid Javid earlier warned that 500,000 jobs would be at risk, Treasury figures now estimate that in a "severe shock" scenario, unemployment would rise by around 800,000, while the value of sterling would depreciate by 15 per cent.

As the government revealed this morning, it would also expect GDP to drop by six per cent, while CPI inflation would increase by 2.7 percentage points a year after a Brexit vote.

The analysis from the Treasury looks at the short term consequences of a vote to leave the EU, and follows up on the government's efforts to evaluate the long term impact, which it said would effectively cost UK households £4,300 a year.

Under the government's milder “shock” scenario, the fall in the value of the pound would be around 12 per cent, while CPI inflation would increase by 2.3 per cent, and GDP would drop by 3.6 per cent.

However, the Treasury forecasts for GDP growth also show that in both scenarios, the UK economy would return to quarter on quarter growth in either 2017 or 2018.

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The Treasury figures have been slammed by Leave campaigners, such as dormer chancellor Lord Norman Lamont, who accused the Treasury of scare tactics.

“A lot of the Government's so-called forecast depends on business confidence, which the Government is doing its best to undermine. Economists are no better than anyone else in predicting shifts in confidence,” Lamont said.

'The link between house prices and the economy is extremely difficult to forecast. The Chancellor claims that house prices will fall by 10% by 2018 if the UK votes to leave, but the independent OBR forecasts that by 2018 house prices will be 10% higher than now – so the Chancellor is claiming that a vote to leave the EU would mean stable house prices.”

Lamont added: “We have nothing to fear but fear itself – which the Government is doing its best to stir up.”

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GOVERNMENT INDUSTRY ANALYSES

FINANCIAL SERVICES

The Treasury analysis also warned that a Brexit vote would generate costly upheaves for the UK's financial services businesses.

It warned the passporting rights of 5,000 firms including banks, investment firms and insurance companies would all be put at risk, with no existing schemes to extend passports outside of EU membership other than remaining within the EEA, which also requires free movement of people and EU contributions.

“In order to continue trading across the Single Market firms could have to restructure themselves,” the Treasury said.

“This could include creating or reconfiguring subsidiaries in EU member states which, by being located in the remaining EU, would have access to the passport. Such actions would involve relocating activities and jobs to the remaining EU.”

The possible need to relocate activities and staff outside of the UK would hit jobs, exports and tax revenue, the Treasury added, while damaging financial services hubs in London, Manchester, Leeds, Cardiff, Edinburgh, Belfast and Birmingham.

As a result, it said, “thousands” of jobs in the sector would be at risk.

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AEROSPACE & AUTOMOTIVE

The UK's aerospace sector employs 110,000 people and supports a further 113,000 jobs through firms like Airbus and Rolls-Royce.

Similarly, the automotive sector directly supports 147,000 jobs, with another 300,000 in the supply chain.

However, the international complexity of supply chains would leave firms in both industries uncertain on delivery after a Brexit vote, the Treasury said.

On aerospace, the Treasury said that UK business would continue to be affected by regulations negotiated through the EU, but would lose influence on Europe-wide negotiating positions

AVIATION & MARITIME

Roughly 248,000 jobs are directly supported by the UK's aviation and maritime sectors, the Treasury said, with many likely to become subject to increased uncertainty around access to the single market in the event of Brexit.

UK-based airlines could lose routes into the EU, the Treasury said, while those flying into the EU will likely still need to be compliant with regulation, with any deviation likely to raise fares.

For the maritime sector, Brexit would create uncertainty over the extent to which EU rules apply to UK shipping, with the sheer weight of business focused on the EU meaning that the incentive to relocate into a member-state would be strong, it added.

AGRICULTURE

A vote to leave would leave the UK's agricultural businesses uncertain on the future of existing subsidies, the government said, as well as raising questions over the level of trade barriers between the UK and foreign agricultural markets.

According to government figures, the EU accounts of 60 per cent of agricultural food exports.

As a result, it warned that farmers and landowners could be expected to delay purchases of machinery and other investments until greater clarity emerges.