MCO Moodys Corp

By Jason Douglas and Max Colchester 

LONDON--Leaving the European Union could cost the U.K. economy up to GBP100 billion ($145 billion) in lost income by 2020 and almost 1 million jobs, one of the U.K.'s most influential business groups said on Monday, in a report that adds fresh fuel to an already heated debate in the U.K. about its relationship with Europe.

Separately, a financial-services lobby group said that Britain's financial sector could be hit in the event of so-called Brexit while, in a third report, credit-rating agency Moody's Investors Service said that a vote in favor of departure could have negative consequences for the creditworthiness of British-based companies and the U.K. government.

The trio of reports bolster Prime Minister David Cameron's arguments that the U.K. would be better off economically by remaining in the EU ahead of a referendum in June.

But they also come as Mr. Cameron faces deepening divisions within his ruling Conservative Party over the U.K.'s future in Europe and broader government strategy, after a senior government minister who supports Britain's exit from the EU resigned on Friday, citing differences over economic policy.

Proponents of Britain's exit say claims that the economy will suffer are exaggerated, arguing instead that the economy will be freer to prosper outside of the EU because the U.K. could focus on trade with faster-growing regions and won't be burdened by the cost of membership.

Senior figures from both sides of the campaign will duke it out this week in appearances before a parliamentary committee looking into the costs and benefits of the U.K.'s EU membership. Pro-Brexit London Mayor Boris Johnson provides testimony on Wednesday and U.K. Treasury chief George Osborne is due to argue for the benefits of remaining in the EU when he appears on Thursday.

In its report on Monday, the Confederation of British Industry, which represents around 190,000 employers in Britain, said that it assessed the economic impact of leaving the EU based on two possible post-exit futures: One in which the U.K. wasn't an EU member but was able to negotiate a free-trade deal with the other 27 members of the bloc, and a second scenario in which no such deal was reached and the relationship between the EU and the U.K. was governed by the World Trade Organization.

The analysis suggested that the British economy could be around 3% smaller by 2020 under a free-trade deal than it would be had it stayed in the EU, and 5.5% smaller under a WTO deal. That equates to between GBP55 billion and GBP100 billion of lost income, according to the report, which was prepared by business services firm PricewaterhouseCoopers LLP for the CBI.

In both scenarios, the largest drag on growth comes from weaker investment, particularly in the short-term, as the U.K. would need to negotiate some form of continued access to the EU's single market for goods and services. Trade and immigration are also forecast to be lower.

Employment growth could also suffer if Britain left the EU, the CBI said. It estimated that there would be 550,000 fewer jobs in the economy by 2020 under the free-trade scenario, compared with continued EU membership, and 950,000 fewer under the WTO scenario.

But the report highlighted that the drag on the economy from leaving the EU would eventually fade--a finding quickly seized on by proponents of quitting the bloc. The CBI said it estimates the economy would be 36% to 39% larger in 2030 than in 2015 under either exit scenarios, but staying in would mean only a slightly larger boost, of 41%.

Vote Leave, which campaigns in favor of a British exit from the EU, criticized the CBI's analysis in a lengthy rebuttal, saying that many of its assumptions were "unrealistic and unreasonable." David Davis, a Conservative lawmaker and advocate of leaving the EU, accused the CBI of "scaremongering."

In a separate analysis on Monday, the Association for Financial Markets in Europe said that some financial-services activity could move out of the U.K., with investment, wealth and private banking especially vulnerable to any restrictions on cross-border activity. Banks and other financial firms based in the U.K. can currently sell their products and services in all EU countries, but such "passporting" arrangements may be threatened if the U.K. wasn't an EU member, the group's report said.

Supporters of leaving say that the U.K. would be able to hammer out favorable access to the EU while also getting more freedom to dictate financial regulation. But some investors say that there could be an EU backlash against the U.K. if the country tries to position itself as an offshore financial center: A Morgan Stanley poll of investors found that 67% thought that the EU would strike back if the U.K. tried to market itself in this way.

Moody's, in its report due to be published on Tuesday, said that it believes the economic costs of leaving the EU outweigh the benefits. The agency said that departure would likely trigger downgrades on the ratings of U.K. corporate bonds because of likely new barriers to trade and immigration.

Brexit could also result in a negative outlook for the U.K.'s own credit rating, currently one rung below the agency's highest credit grade, Moody's said.

Moody's added that the U.K. and the remainder of the EU would have strong incentives to minimize the economic impact of a British departure, given the strong links between the two, which Vote Leave highlighted as evidence that concerns over lost trade are overblown.

Write to Jason Douglas at jason.douglas@wsj.com and Max Colchester at max.colchester@wsj.com

(END) Dow Jones Newswires

March 21, 2016 20:15 ET (00:15 GMT)

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