Assessing the Macroeconomic Impact of Brexit Through Trade and Migration Channels

Abstract

This joint work by the Bundesbank, the Banque de France and the Banco de Espana highlights some of the numerous channels through which Brexit will affect the UK economy and its economic partners. In particular, it focuses on trade and migration channels, adding a more general assessment of exiting the EU through the use of a gravity model. The trade channel alone may cut UK GDP by 2% over the medium term if the UK reverts to WTO rules, while a more general gravity model would point to UK GDP falling by almost 6% compared to baseline. According to our analysis, the ‘cost of non-Europe’ (such as originally stated by Cecchini’s seminal work in 1988) lies therefore between 2% and 6% in terms of real GDP losses for the UK. With the shock being largely asymmetric, the EA remains relatively unscathed by the UK’s exit, with GDP less than 1% lower than baseline by 2023. The study also shows that results are sensitive to the envisaged policy response. In general, monetary and fiscal policies may act to cushion a Brexit-related shock; however, the potency of the policy response depends on the underlying source of the shock.