The Treasury today published its analysis of the short-term economic impact of a “Brexit” vote. The report states that the economy would fall into a recession immediately following such a vote on 23 June, with no recovery until the third quarter of 2017 at the earliest. After two years (i.e. by the second quarter of 2018), GDP would be between 3.6% and 6.0% lower than in the alternative scenario of a vote to remain.

The analysis assumes that a Brexit vote would have large negative effects on long-run income expectations, uncertainty and financial market conditions. It then attempts to quantify the impact of these assumptions on key macroeconomic variables.

The analysis is internally consistent but it is important to realise that the forecast of a significant recession flows directly from the Treasury’s assumptions.

A key role is played by a composite measure of uncertainty based on financial market prices and consumer / business surveys. The Treasury shows that this measure has been negatively related to household consumption, business investment and financial market conditions historically. It would be expected to rise following a Brexit vote, but by how much?

The Treasury assumes an increase equivalent to between 1.0 and 1.5 times the measure’s historical standard deviation. This implies a level of uncertainty reached previously only during recessions and the Eurozone crisis – see chart. The Treasury’s modelling work traces out the direct and indirect (via financial market conditions) implications for GDP and other macroeconomic variables. The conclusion of a recession, however, is circular – it depends on the assumption that uncertainty rises to a level rarely reached outside recessions.

The extent of a post-Brexit-vote rise in uncertainty is unknowable. The value of detailed forecasting exercises that assume away this lack of knowledge is questionable.