Brexit and the economy: the hit has been ‘substantially negative’

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The UK debate around Brexit is shifting in light of new data showing the consequences of leaving the EU. In new a four part series, the FT examines the impact on Britain’s economy, trade, business and politics.

Almost two years after Britain left the EU, economists have reached a consensus: Brexit has significantly worsened the country’s economic performance. They agree that the vote to leave the bloc has made households poorer, that negotiating uncertainties have taken their toll on business investment and that new barriers to trade have damaged economic links between the UK and EU. While economists and officials do not agree on the precise magnitude of the Brexit effect, they consider it to be large. They also agree that new trade agreements with countries such as Australia and regulatory freedoms gained from leaving the bloc do not come close to offsetting the damage. Andrew Bailey, Bank of England governor, told MPs this month that the central bank assumed that Brexit would cause “a long-run downshift in the level of productivity of a bit over 3 per cent” — most of which had already happened. “We have not changed our view on that so far,” he said. The Office for Budget Responsibility, the fiscal watchdog, expects the UK economy to end up 4 per cent smaller than it would otherwise have been — a £100bn a year hit to prosperity — leaving the public finances less sustainable in part due to “a significant adverse impact on UK trade”. Some former officials have gone further. “Put it this way, in 2016 the British economy was 90 per cent the size of Germany’s,” said Mark Carney, former BoE governor. “Now it is less than 70 per cent.”

Simon French, chief economist at Panmure Gordon, said that Brexit resulted in a rise in the cost of capital for UK companies as investors worried about diminished prospects of doing business in Britain. While he said other countries also saw weak business investment during the pandemic, the effect was much worse in the UK and looking at EU and US trends “suggests a material undershoot [of investment] of around £60bn a year”. Most of the latest academic efforts have tried to quantify the trade impact of Boris Johnson’s Brexit deal, the Trade and Cooperation Agreement, which came into force at the start of 2021…

Author: Chris Giles, Financial Times

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Simon French

Managing Director, Head of Research

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