We recently published the Q2 2016 edition of the LSR UK Outlook. Our central forecasts assume that the UK remains in the EU, but we also modelled a ‘Brexit risk’ scenario. This risk involved shocking the model in a number of different ways, in particular by weakening trade-weighted sterling, increasing the level of household’s precautionary saving and reducing the share of business investment associated with exports to the EU to a ‘depreciation-replacement’ only level.
The difference in the quarterly profile of growth between our central projection and that produced in the Brexit scenario is shown in the chart above. While lasting impact of worse-case scenarios is small relative to historic GDP volatility, the long-term risks to trade and growth, even for the UK lie elsewhere.
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