In the short term, GDP growth is likely to slow. This is due to a combination of factors such as a slowdown in investment, the pound’s depreciation and the lingering effects of the coronavirus pandemic.
The UK’s re-introduction of barriers to trade with its largest trading partner has had, as predicted, some direct impacts. But it has also reduced its broader competitiveness.
In terms of growth, the immediate impact of Brexit seems to have been a pound depreciation-driven rise in inflation and a fall in investment. This has led to a reduction in trade and industrial production. The UK’s economy has therefore weakened relative to its peers, as outlined in the latest report by the Resolution Foundation and the Centre for European Reform.
However, as Springford explains, these models only measure how the UK’s growth rate changed after 2016. They do not tell us why it changed. Changes in policy unrelated to Brexit, or to changes in the economic environment elsewhere, could explain the change. It is important to supplement these models with qualitative descriptions of the changes that have occurred. This is where the report from Raczko, Wazzi and Yan comes in. It uses an algorithm to select countries whose performance closely matches that of the pre-Brexit UK, and creates a “doppelganger”. It estimates that Brexit reduced the doppelganger’s GDP, GDP per capita, investment and goods and services trade.
2. Investment Impact on UK Economy
The UK’s economic underperformance since the Brexit vote has been blamed on a variety of factors – from pound depreciation to rising oil prices to the coronavirus pandemic. But many economists agree that leaving the European single market and imposing high barriers to trade and investment with the UK’s biggest trading partner has reduced business investment growth.
The uncertainty generated by Brexit has already cut firms’ investment in goods, and lowered their productivity. This has had the biggest effect on highly productive firms that are most exposed to EU trade.
As a result, the UK has fallen behind its peers in manufacturing and services – although it has made some progress on reducing its deficit by bringing forward spending cuts. The government’s independent forecaster, the Office for Budget Responsibility, has assumed that GDP will be 4% lower by 2028 than it would have been if we had stayed in the EU.
The immediate effect of Brexit impact has been to restrict labour supply. Leaving the EU has meant ending free movement of workers and introducing a points-based system. As a result, UK wage growth has been weak and household incomes have deteriorated.
But this is not the only long-term cost of Brexit. Other economic damage includes a reduction in Britain’s trade openness, limiting competition for domestic firms and hampering innovation. In addition, a smaller UK economy makes it harder to attract foreign investment and to develop global supply chains.
The Resolution Foundation and LSE’s latest study of the impact of Brexit, published today (embargoed copies available from RF), concludes that it has reduced how open and competitive the UK economy is. This will ultimately reduce productivity and worker’s real wages in the years to come.
4. Prices Brexit impact
In the short term, even among people who think Britain will be worse off after Brexit – the so-called pessimists – few indicate that they would reduce consumption spending. This is partly because the Office for National Statistics’ data suggest that we have not yet seen – as conventional trade models would imply – a sharp fall in our trade with the EU in goods and services (although it has weakened).
It also appears that the COVID-19 pandemic has not made a substantial difference to UK productivity or workers’ real wages, as might have been expected from some of the Brexit impact predictions. However, that does not mean that Brexit has not already done damage. This is because it will make the economy more closed, restricting its ability to trade with countries beyond the EU and thus reducing its competitiveness, investment and productivity. This will ultimately lower workers’ real wages. It will also increase household and business costs, requiring higher interest rates from the Bank of England and therefore reducing growth.