Oxford Economics has made estimates in its global macro model showing that British GDP can have growth levels up to 4 percent lower in 2030 if Britain chooses to leave the EU, compared with remaining in the EU. Our assessment is that Britain, in the unlikely scenario of a Brexit, manages to negotiate a favourable trade agreement with the EU and that the negative effects will be limited. It is in the interest of the UK and the EU, since trade is extensive in both directions. However it will take several years to negotiate trade agreements. The British economy is developing relatively well and we expect GDP to increase with around 2 per cent both this year and next.
Today, around 1100 Swedish companies are operating in the UK market, employing over 100 000 people. Britain is the EU country that receives the most foreign direct investment and attracts most international headquarters. When Business Sweden in the autumn of 2015 asked the Swedish companies, operating in the UK if they are concerned that a Brexit will affect their business negatively - only a small percentage of companies responded that they were worried. A month before the British EU referendum companies demonstrates much greater concern. A survey commissioned by the Swedish Chamber of Commerce in Great Britain shows that 75 percent of companies are concerned that Brexit will have negative effects on their business. Above all, they are worried about the negative impact on sales, but also on investment and employment.
It is almost impossible to estimate the effects of a potential Brexit. However, there is consensus among economists that a Brexit would have negative effects on the UK and EU as well as Sweden. During a seminar organized by Business Sweden, Oxford Economics recently unveiled results from simulations of the effects of Brexit at various types of trade. The estimated long-term effects of a Brexit show that British GDP could be between -0.1 to -3.9 per cent lower in 2030 compared to the baseline scenario. The effect is less than with a liberal customs union and the largest negative difference in GDP growth is if it attains the WTO's Most Favored Nation status. The UK Treasury recently published a comprehensive analysis of long-term effects of Brexit on the British economy. The impact on GDP is significantly larger than the Oxford Economics report. It is mainly due to predictions from the Finance Ministry which expects a decline in the stock of direct investment. Given that Britain is the EU's biggest recipient of foreign direct investment this would of course have major consequences. A relevant question in this context is whether London will remain a financial centre. The city is likely to experience a decline to some extent, although a financial centre of London’s dignity does not move so easily.
The British economy is the fifth largest economy in the world and the second largest economy in the EU. Until the financial crisis the UK economy grew by around 3 percent per year. The global financial crisis hit the British economy hard much because of its large financial sector. Since then, the economy recovered at a relatively good pace to slow down in the last year. This is partly due to uncertainty about the EU referendum which is holding back consumption and investment and thus GDP growth. The UK labour market is developing well and the unemployment rate has fallen rapidly to 5.1 percent, but levelled off in recent months. The main driver for the strong growth is private consumption. Two-thirds of GDP in the UK comes from private consumption. This means that exports represent a far smaller share than in Sweden, where exports account for half of GDP.
It is primarily the service sector that drives the British economy. The manufacturing sector has stagnated in recent years as a result of the earlier strengthening of the pound, weak external demand and weak investment. The British economy needs to be rebalanced so that it becomes less dependent on private consumption. Britain's challenge notwithstanding a potentially Brexit is to increase productivity and investing in infrastructure and housing.
Britain has a deficit in the public finances, public debt is high (over 90 per cent of GDP) and the current account deficit is alarming. This means that the government has limited ability to stimulate the economy if needed. The Bank of England has clearly stated that it is prepared to stimulate the British economy if Britain chooses to leave the EU. In such a situation it may be necessary to adjust interest rates and also pursue a policy of quantitative easing, i.e. the purchase of government bonds. Our assessment is that Britain, after all, remains in the EU and that the economy will grow with about 2 percent this year and slightly more next year.
Voter turnout will play a large role in the outcome of the referendum. A high turnout is expected to favour the remain side. A Brexit would have negative effects for both Sweden and our Swedish businesses even though we believe that the effects are manageable. The consequences for the EU as a long-term political project could prove to be much more damaging.