UK Treasury Warns Brexit Could Cause a Recession

A report released by the U.K. Treasury on Monday said that the country could fall into a yearlong recession and experience a “profound shock” if citizens vote to leave the 28 member European Union in the June referendum, popularly referred to as Brexit. The report provides fresh ammunition to the people that are against Brexit and might persuade the unsure ones to vote against it.

The report says the country’s economy could contract by 3.6% in the next two years as the businesses may reduce investments and cut jobs, if the U.K. decides to leave the European Union. Chancellor of the Exchequer George Osborne said, “A vote to leave would represent an immediate and profound shock to the economy.” (See also: Brexit Would Make UK "Permanently Poorer". )

The report also highlighted that a Brexit could lead the pound to tumble by roughly 12% and inflation to increase by 2.3%. The report also provided a “severe shock” scenario, which could result in the GDP falling by 6%, the pound depreciating by 15% and inflation increasing by 2.7%.

Osborne said, “In this severe scenario...there would be a deeper recession, and the number of people made unemployed would be rise by around 800,000 compared with a vote to remain.” He added, “There is a credible risk that this more acute scenario could materialize.”

The Treasury also warned that “the U.K. economy would be subject to repeated and persistent rises in uncertainty, which would depress further economic prospects” if the negotiations with the European Union are delayed or are not favorable.

In the “shock scenario,” the report said that the number of job cuts would be around 500,000. Prime Minister David Cameron said, “If we make this decision to leave the EU, to get out of the single market and hit our economy and hit jobs, it would be very, very difficult, if not impossible, to reverse that decision.” (See also, 3 Brexit Doomsday Scenarios.)

Some advocates of Brexit believe that the U.K. Treasury report is biased toward downside risk. Iain Duncan Smith, the Former Work and Pensions Secretary, said, “They have today chosen only to produce the downside. That makes this report categorically unfair and biased.”

The advocates of Brexit believe that the report was released to convince voters who are still undecided about their vote. According to an opinion poll published on May 21, 16% people still haven't decided on their vote while 44% vote “remain” and 40% vote “leave.”

Even Moody’s Investor Services, a credit rating agency, highlighted that there were some benefits of a Brexit. They stated earlier that “[there will be] lower competition for housing, as house price and rental inflation would slow down if immigration is curbed.”