U.K. Treasury Says EU Exit Could Cause Recession

LONDON—The U.K. economy could fall into recession if the country votes to leave the European Union in a referendum next month, according to a U.K. Treasury analysis due to be published Monday.

The analysis will say that a vote in favor of a British exit from the EU, or Brexit, in a referendum scheduled for June 23 could trigger "an immediate and profound economic shock," according to excerpts released by the Treasury in advance.

Britain's economy has become a key battleground in a fierce debate over the country's membership of the EU. The Treasury's latest analysis adds to warnings over the potential cost of Brexit from the Bank of England, the International Monetary Fund and the Organization for Economic Cooperation and Development.

Proponents of quitting the bloc dispute such claims, saying that any disruption following a vote to leave will be short-lived and that the U.K. will ultimately be better off outside the EU, where it will be free of burdensome EU regulation and can pursue its own trade deals with faster-growing parts of the world.

Prime Minister David Cameron and Treasury chief George Osborne are due to present the findings of the Treasury analysis at an event later Monday. Mr. Cameron in a statement Sunday said leaving the EU represents "a leap in the dark that would risk prosperity and security."

Mr. Osborne intends to say on Monday that British people must ask themselves whether they can "knowingly vote for a recession," according to extracts of his planned remarks. Choosing to remain in the EU represents "the brighter future on offer," Mr. Osborne will say.

The Treasury's new analysis, which focuses on the possible short-term costs of Brexit, follows a report in April into the potential long-term costs of leaving the EU.

The new analysis will say the economy could suffer a year-long recession after a vote to leave, defined as two or more consecutive quarters of falling output.

The Treasury will say the hit to the economy would likely come as uncertainty about the economy's future prospects delays spending and investment, and financial-market volatility squeezes the supply of credit for households and businesses. It also anticipates a surge in inflation fueled by a falling pound and a decline in house prices of around 10%—claims dismissed by pro-Brexit campaigners.

"Sterling will not fall if we vote Leave, so claims of prices rises are wrong," said Robert Oxley, spokesman for campaign group Vote Leave, in an emailed statement.

The Treasury will say that the economy could be as much as 3.6% smaller after two years if Britons vote to leave than if they vote to stay in. The analysis will also say that the potential cost could be almost twice as large if the U.K. immediately leaves Europe's single market and chooses to trade with its neighbors under World Trade Organization rules, which some in the pro-Brexit camp have advocated.

The Treasury's intervention came after Turkey's place in Europe on Sunday became the latest battle line to be drawn between Mr. Cameron and campaigners pushing for the U.K. to leave the EU.

Mr. Cameron on Sunday responded to claims by Vote Leave that Turkey would soon be allowed to join the EU, giving millions of citizens from the Muslim-majority nation the right to live and work in Britain.

On Sunday, Mr. Cameron locked horns with Penny Mordaunt, a pro-Leave proponent who is also a minister in Mr. Cameron's government. Ms. Mordaunt said in an interview with the British Broadcasting Corp. that Britain wouldn't be able to stop Turkey joining the EU, but Mr. Cameron dismissed Ms. Mordaunt's claims in an interview with rival broadcaster ITV PLC, saying "it is not remotely on the cards that Turkey is going to join the EU any time soon."

The sparring underscores how advocates on both side of the debate are zeroing in on their strongest arguments, with Leave campaigners highlighting the risks of immigration in the face of warnings by the government-backed Remain camp that the economy will be seriously damaged if the U.K. pulls out of the EU.

Write to Jason Douglas at [e-mail] and Alexis Flynn at [e-mail]

(END) Dow Jones Newswires

May 22, 2016 21:45 ET (01:45 GMT)

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