The pound could suffer a 20% depreciation in the immediate aftermath of the European Union referendum, should Britons vote to leave the 28-country bloc, the National Institute of Economic and Social Research (NIESR) said on Tuesday (10 May).
NIESR added that in the event of a Brexit, by 2017 Britain's gross domestic product would be 1% smaller than if it voted to stay in and 2.3% smaller by 2018.
"Heightened risk and uncertainty will cause sterling to depreciate by around 20% immediately following the referendum, which will result in an intense bout of inflationary pressure," NIESR warned.
By 2030, Britain's economy could be between 1.5% and 3.7% smaller if the UK left the EU, according to the research body's forecast. NIESR said the rate of decline would depend on how favourable a trade deal Britain can secure if it were to leave the 28-country bloc. Should the 'Remain' campaign prevail at the 23 June referendum, NIESR expects the UK economy to shrink by 2% in 2016, 2.7% in the following 12 months and 2.5% in 2018.
NIESR also predicts a decline in real wages between 2.2% and 6.3% if Britain left the union.
"A vote to leave the EU would represent a significant shock to the UK economy," NIESR added.
"This shock would be likely to manifest itself through a number of channels, some of which might be expected to be relatively short-lived, predominantly affecting the near-term outlook."
The forecast is likely to be a hot topic of discussion in the coming days, with the Chancellor George Osborne set to appear before the Treasury Select Committee on Wednesday. In all likelihood, Osborne will be questioned on a Treasury report, which forecast the UK economy could be 6% smaller by 2030 if Britain left the EU.
Meanwhile, on Friday, the International Monetary Fund will release its yearly study of the UK economy, in which it is expected to claim that leaving the EU would be extremely costly for Britain.