UK services trade with EU set to fall 60% after Brexit - think tank

Britain's trade in services with the European Union is likely to fall by 60 per cent if the United Kingdom leaves the European single market, according to a new report by the country's leading economic think tank. The National Institute of Economic and Social Research (NIESR) says trade in services will slump by almost two-thirds, even if Britain secures a free-trade agreement (FTA) with the EU after Brexit.

The prospect for trade in goods is less stark, with a decline of 35-44 per cent if Britain secures an FTA with the European Economic Area (EEA), which includes all EU member states, along with Norway, Iceland and Liechtenstein.

“The main finding is that, after leaving the EU, it might be difficult to replace lost trade with other EEA members by means of less comprehensive FTAs, either with the EU or with other third countries. The reason is that EEA membership is associated with larger trade flows than is membership in less comprehensive FTAs.”

More than half of the UK's trade in goods and 40 per cent of its trade in services is with the EU, so the decline in trade would account for up to a quarter of total trade in both categories. The report says that although new trade deals with non-EU countries such as the United States and China could offer a modest boost to trade in goods, they would have a negligible impact on trade in services.

Price inflation

NIESR's quarterly economic forecast predicts that the UK economy will grow by 2 per cent in 2016, slowing to 1.4 per cent in 2017, with the start of formal Brexit talks under article 50 of the Lisbon Treaty representing a downside risk. Consumer price inflation will rise to almost 4 per cent in the second half of next year, depressing real disposable income and consumer spending.

"The depreciation of sterling has been the most striking feature of the post-referendum economic landscape. This will pass through into consumer prices over the coming months and quarters. By the end of 2017, we expect consumer price inflation to have reached almost 4 per cent. While we expect this to be only a temporary phenomenon, it will nonetheless weigh on the purchasing power of consumers over the next couple of years," said Simon Kirby, head of macroeconomic modelling and forecasting at NIESR.

NIESR’s forecast of world output growth for 2016 is unchanged at 3 per cent, the slowest annual growth rate since the 2009 recession. World growth is expected to strengthen to 3.2 per cent next year and 3.6 per cent in 2018, but to remain slower than before the global financial crisis.