It perhaps comes as no surprise that our latest event on the hot topic of Brexit was oversubscribed, with our three discussants - Jagjit Chadha, Rebecca Harding and Jaqueline Minor - speaking to a packed house.

Jagjit kicked off the event by looking back over NIESR’s forecasts from a year ago and considered the risks involved in forecasting more generally. He showed the various published  forecasts for the impact of Brexit on the UK economy with NIESR’s view being close to the median. Some forecasters’ views of the Brexit effect were exaggerated for political purposes - when we look at why forecasts might have proved wrong it is therefore important to consider the context of the forecast in the first place.

Uncertainty was expected to cause a slowdown in investment (Dixit/Pindyck-style) and a fall in the exchange rate would lead to temporary inflation, real wage erosion, and slower consumer spending growth in NIESR’s view. GDP was forecast to be up to 3% below the baseline case of no Brexit in the coming years while inflation could be around 2pp higher. Trade could slow sharply after departure from the Single Market, while crafting new trade deals with more geographically distant countries provides only a limited partial offset. With little room for manoeuvre on fiscal policy (think long-run demographic constraints here) there is little the government can do to offset the impact of Brexit. Moreover, the coming years’ negotiations means the government will be putting other important issues on the back-burner.

Rebecca continued the discussion by focusing on trade. She noted that it might have been a mistake to trigger Article 50 so early particularly with the snap general election wasting precious time in the 24-month process. Rebecca believes that falling sterling is not expected to have a persistent effect on UK trade, arguing that the J-curve is only a short term phenomenon. Still, it may be quite some time, possibly 5-10 years, before we have a good idea of the final impact of Brexit on trade.

Looking at trends in trade using Rebecca’s harmonised datasets, there are challenges even if Brexit didn’t happen, with global trade over the past 5-10 years disappointing (trade growth has slowed relative to that of GDP). UK goods trade is not expected to change much this year, according to Rebecca’s model, and government emphasis should be placed on supporting trade in the most strategically important export sectors such as cars, pharma etc. The near-term outlook for services trade is better, however, but with Brexit looming financial services will be a key priority for the government.

Rebecca concluded by arguing that UK trade is highly strategic - it is worth more to the UK than simply the economic benefits that are associated with it. This is highlighted by the fact that a sizeable portion of goods exports are “dual use” (civilian and military use). As a result trade must be maintained for both economic and “nation state” purposes.

Last but not least, Jaqueline began by noting the unity among the remaining 27 EU members over three principles surrounding Brexit: a) regret, but acceptance, b) no cherry picking, c) no negotiations until notification under Article 50. The UK remains an EU member for the time being - it continues to participate in the EU and may not conduct its own trade negotiations. After detailed negotiating plans are accepted, the discussions may finally get under way in mid-June leaving just 21 months to finalise a deal - a relatively short period given it must include time for ratification by the European Parliament. Deadlines are tight - discussions on the future relationship can only begin after an exit deal is agreed, according to the EU, with the intention that this first part of the process is concluded by end-2017. The divorce settlement requires qualified majority voting, though there are questions over whether a transition agreement can be embedded in this part of the deal to avoid the need for unanimity.

Under no agreement, the UK leaves the EU empty handed following which implementing WTO rules would be complicated. Only after the two-year Article 50 process is complete can the detail of any future relationship be negotiated.. This requires unanimity among the EU27 as was the case for CETA and would be needed for TTIP - there are over 30 national and regional parliaments in the EU that must accept. Jacqueline expects the EU will want a single all-encompassing agreement citing the principle that “nothing is agreed until everything is agreed”. A close trading relationship will require guarantees that UK deregulation will be modest.

In terms of financial services, Jacqueline believes it will be difficult to maintain passporting rights. Rather, enhanced equivalence is more feasible but there would need to be some mechanism to ensure financial regulatory convergence. Enforcement/dispute resolution could also prove a tricky issue and may raise questions about the ability of the UK to extricate itself from the ECJ. In summary Jacqueline notes the importance of a speedy divorce settlement to give enough time for the remaining negotiations, highlighting the risk that there would be little time for parties to return to the negotiating table in the event that these initial talks turn sour before year-end.

With many thanks to our three speakers for an excellent and varied discussion on trade and the implications of Brexit, and to Jagjit and NIESR particularly for the use of their splendid library to host the event.