Impact case study database

Given that the long-run stagnation in the United Kingdom’s productivity is of key concern to monetary policymakers, in September 2018, R2 was presented to members of the Bank’s Monetary Policy Committee (MPC) at a One Bank Research Awayday. Considering the model’s ability to analyse the impact of changes in barriers to trade on productivity and the wider economy, it was identified at the Bank as clearly suited for an analysis of the impact of the United Kingdom’s withdrawal from the EU. The theoretical model in R3 has also been calibrated and applied to examine the effects of changes in tariff and non-tariff barriers to trade associated to the United Kingdom’s withdrawal from the EU across a range of possible post-Brexit trade scenarios of interest to the Bank or the purpose of understanding monetary policy. Chris Young, the Head of the Structural Economics Division at the Bank of England said : “the results of this work were presented to the Monetary Policy Committee directly, providing them with helpful guidance in understanding the consequences of the United Kingdom’s withdrawal from the European Union.” [E1]

On 27 June 2018, the House of Commons Treasury Committee requested that the Bank of England publish their analysis of how leaving the EU would affect its ability to deliver its objectives for monetary and financial stability “in good time before Parliament comes to make its key decisions” [E2]. In response to this request, on 28 November 2018, the Bank published their analysis of the EU withdrawal scenarios and monetary and financial stability [E3]. The Bank’s analysis report drew heavily on the model in R3, as one of a suite of macroeconomic models used to analyse and inform the Bank on the effects of various No-Deal scenarios on the United Kingdom’s GDP, in their modelling of EU withdrawal scenarios. Up to this point, internal models and other non-Bank research were only able to offer a view on the long-run impact of various scenarios for the United Kingdom’s withdrawal from the EU on the United Kingdom’s economy, but not on the short-run. Because Nicolae and Nower’s model could analyse the short-run effects, it gave policymakers a better view as to the likely path of the economy in the months following Brexit, specifically predicting the potential for decrease of 7.75% in GDP in the event of a Disorderly exit, seen in Chart A: GDP in EU withdrawal scenarios on page 7 of the Bank’s report (Chart A was also included in the Bank’s two-page report summary, under the heading ‘Modelled scenarios based on different assumptions about Brexit’, reproduced above) [E3].

Young, said : R3 “[...] suggested the key insight that withdrawing from the European Union with no deal would result in an immediate, sharp drop in GDP relative to its previous trend. Further, their research suggested that the initial sizable fall in the level of GDP would be larger than the long-run fall, such that GDP would remain below its new equilibrium for several years. Both these predictions were incorporated into the Bank’s analysis” [E1] . Chart A was subsequently reproduced widely in the national (and international) press. The publication of the Bank’s analysis and especially that part based on the underpinning research in R3 changed the tone of the debate in Britain.

The Bank’s report received a substantial amount of public and media interest at the time, with coverage including the BBC, ITV, The Guardian, Sky News and The Telegraph [E4]. Many media organisations made particular reference to the potential short-run impact of the worst case, No-Deal Brexit. Sky News wrote on 28 November: “ The Bank of England says that a disorderly Brexit could push the UK towards the biggest slump in modern memory. *It says that a disorderly Brexit, involving no new trade deals, severe disruption at borders and uncertain economic conditions, could lead to the British economy shrinking by nearly 8% - more than the effect of the financial crisis.*” [E4] As Young said: “ the research undertaken at Durham has allowed us to gain new insights into the impact of changes in international trade on productivity, especially in relation to the dynamics, and has benefitted monetary policymakers by offering a view as to the likely path of the UK economy in the months following EU withdrawal”. [E1]

The ongoing collaboration of Nicolae and Nower with Millard at the Bank of England on evaluating the effects of various possible trade scenarios/agreements following the United Kingdom’s exit from the EU on key areas of the United Kingdom’s economy (such as labour productivity and GDP) based on R3, led to work which contributed to the ' Trade and Productivity' internal Bank project, as it “ provides unique insights into the dynamic short-run path of the UK economy after withdrawal”, “the results of which were presented to the Monetary Policy Committee”, and which, as Dr Longoni who led the project stated: “ has benefitted monetary policymakers by offering a view as to the likely path of the UK economy in the months following Brexit.” [E1]

In addition to its impact on monetary policymaking, the Bank’s report, and its unique insight into the short run behaviour of GDP, was also used by MPs as part of their deliberations over the United Kingdom’s leaving the EU with No Deal, which they subsequently voted against when voting in the House of Commons. The House of Commons Hansard shows that of the 24 MPs who made direct reference to the Bank’s analysis in their speeches during various parliamentary debates taking place between the date of the publication of the Bank’s report (28 November 2018) and the 27 March 2019 indicative vote on No Deal, 20 of them (83.3%) voted against No Deal, 2 voted for, and 2 abstained [E9(a)]. Furthermore, of the 29 MPs who made reference to the Bank’s analysis between its publication and the “Benn Bill” vote on 4 September 2019, 25 of them (86.2%) voted against a No Deal exit. Additionally, all 13 MPs who made direct reference to the dramatic short-run drop in GDP following a No-Deal Brexit then went on to vote against a No-Deal Brexit, in favour of the “Benn Bill”. Among them, John McDonnell, Shadow Chancellor of the Exchequer, said in his speech: "The Bank of England said that it [No-Deal Brexit] could cause more economic damage than the financial crisis of 10 years ago [...]", while Mr Philip Hammond, former Chancellor of the Exchequer, stated, referring to the analysis of the short-term GDP, that No-Deal Brexit “could cause a recession, with GDP reduced by up to 7.75% and unemployment rising to 7.5%.” [E9(b)]

In addition to this, in response to the 2017 International Trade Select Committee inquiry into UK Trade options post 2019, the model developed in R2 was calibrated with the three countries in the model being the United Kingdom, the EU and the Rest of the World and applied to study various trade scenarios. The results presented by the Durham team in a written evidence submission [E5(a)] showed that the decision as to which future trade scenario is preferred for the United Kingdom would depend on the relative weightings of the Government’s priorities: higher prioritisation of increasing employment would make trading under WTO rules preferable, while greater priority for increasing productivity would make EEA membership preferable. This advice was picked up directly within the committee’s final report to government, which stated: “ Dr Anamaria Nicolae and Michael Nower, of Durham University, noted that the value of the unilateral free trade model depended on what one valued in the economy: [I]t would be desirable for the UK to adopt a unilateral free-trade, low tariff or uniform-tariff approach if […] [the Government] are prioritizing maximising UK productivity growth, consumption, or wages, and minimising UK price growth. However, if the UK government is prioritizing maximizing the number of firms (and hence employment), then adopting such an approach would not be desirable.’ [E6, pg.45]. Subsequently, the same advice was incorporated verbatim by the Scottish Parliament Information Centre (SPICe) in its ‘UK trade policy and Brexit’ briefing (March 2018) [E7, pg.44].

Nicolae and Nower submitted further evidence to the 2018 International Trade Committee’s inquiry into Continuing application of EU trade agreements after Brexit [E5(b)]. While almost all contributions to this inquiry suggested that the Government’s policy objective should be that of seeking continuity on EU’s FTAs and any of the other trade related treaties to which the EU is a party, Nicolae and Nower’s submission was the only one able to quantify the short and long term effect on GDP from not grandfathering any of the EU’s FTAs and any of the other trade related treaties to which the EU is a party. Applying the model from R3, they calculated and showed how much grandfathering would contribute to minimizing reduction in the United Kingdom’s GDP post Brexit. Again, the advice was incorporated into the committee’s final report to government. “ Dr Anamaria Nicolae and Michael Nower, of Durham University Business School, calculated that “[n]ot grandfathering any of the EU’s FTAs and any of the other trade related treaties to which the EU is a party, will reduce GDP long term by 1.1% and short term by 2.7%”. [E6, pg.89]

Following written evidence submitted to the International Trade Select Committee Trade and the Commonwealth: Australia and New Zealand inquiry [E5(c)], Nicolae and Nower were invited to give oral evidence, presented by Nower on 9 January 2019. Drawing on calculations based on the model in R3, Nower advised the committee about the potential impact of future free trade agreements between the United Kingdom and Australia and New Zealand on the United Kingdom’s economy, as well as the impact of future trade arrangements between the United Kingdom and EU on the ability of the United Kingdom to strike free trade agreements with non-EU countries, and the desirability of the United Kingdom seeking membership of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. [E8]

Through ongoing engagement with former local MEP Jude Kirton-Darling, Durham’s research further contributed to the debate on the consequences of No-Deal on the economy and to informing the general public. Following a meeting with Kirton-Darling on 14 June 2019, in which a study based on R3, on the consequences of No-Deal Brexit, was presented, the online publication northeastlabour.eu wrote: “The outcome of the study has prompted North East Labour MEP Jude Kirton-Darling to warn Conservative Party leadership contenders against the damage a No-Deal Brexit can cause: “ This is further proof that a no-deal Brexit should not be on the negotiating table as an option, or anywhere near it. With damning evidence against it piling on, I find it shocking that no-deal is still featuring so prominently in the Brexit discourse.” [E10(a)]

In July 2017, Nicolae began discussions with regional strategic bodies and business groups, to support them in their campaigns with local businesses, to both inform, and ensure necessary changes needed are made in preparation for Brexit. A Policy Note [E10(b)] written by applying R3 to five possible post-Brexit trade scenarios, brought awareness on the effects of possible future trade scenarios on key macroeconomics variables to North East business, as it was circulated to the North East England Chamber of Commerce (NEECC) International Trade Committee. The Policy Note is also hosted on the NEECC online ‘ Brexit Knowledge Hub’ in ‘ Preparing for Brexit’, with accompanying Potential Brexit Impact on the UK Economy: FAQs answered by the Durham team, offering regional business accessible information regarding the implications of different trade scenarios to help them prepare for Brexit [E10(c)]. Nicolae and Nower also took part in NEECC’s ‘Preparing for Brexit’ series of events for regional stakeholders, covering the economic implications of No-Deal Brexit [E10(d)]. Jack Simpson, Policy Adviser at NEECC said: “These activities, while providing us with a better understanding of the effect of Brexit on the economy, have been useful in informing our members and make them aware of the business implications of various Brexit scenarios, No-Deal especially, in order to encourage them to carry out the necessary planning and preparation to place their businesses in the best position to succeed after UK’s exit from the EU.” [E10(e)]