Simon French: The Times Column: Brexit back in focus, 6 years on

Almost six years have now passed since the UK’s vote to leave the European Union. Over that period the UK economy has grown by 7%, total employment is up by 2%, the FTSE 100 has risen by 19%, the average house price is higher by 32% and consumer prices have increased by a cumulative 18%.  Given the warnings that preceded the 2016 Referendum – that sometimes verged on foreseeing economic Armageddon – it may be easy to conclude that this data largely vindicates the decision to leave the EU. Sober and credible economic analysis however requires digging deeper than these headline measures. Such analysis has often fallen victim to fractious politics that has seen three Prime Ministers (at least at the time of writing) and four Chancellors over the last six years. All alongside the enormous economic and social upheaval from a global pandemic. 

Anniversaries of momentous events often provide the catalyst for such analysis. The recently concluded Jubilee weekend being one such opportunity to appraise the achievements and challenges of the second Elizabethan Age. The sixth anniversary of the Brexit vote will come later this month amidst a considerable cost of living squeeze and with the first Conservative backbench MP, Tobias Ellwood, now openly calling for a return to the Single Market to help ease cost inflation and address the political impasse that has taken hold in Northern Ireland. The anniversary also comes as senior pro-Brexit MPs grow increasingly frustrated at what they see as a lack of divergence from the EU economic and social model.

So before considering the virtues of these very different forward pathways, let us take a moment to consider how the UK economy has performed since the Brexit vote. To date there have been three clear costs. Firstly, and most strikingly, business investment has stalled. By our estimates at Panmure Gordon, the amount businesses are currently investing in the UK is around £58bn/year lower than would have been the case had the UK remained in the Single Market and Customs Union. Whilst some of this has have been diverted to shareholders in the form of dividends, some of this is lost economic output which may never be recovered as company boards have faced prolonged Brexit-induced uncertainties to their trading outlook. The Chancellor’s recent focus on trying to encourage greater investment is laudable, but his own support for Brexit has made this important job harder than it needed to be.    

Secondly, the weakness in the Pound – down by 9% since June 2016 – and the low valuations attributed to UK public companies, have squeezed profit margins and raised the relative cost of raising capital in the UK. For a country whose traditional economic strength includes its integrated supply chains and its outsized finance sector these are considerable costs. We estimate that the value of public companies listed in the UK is around £500 billion lower than it would have been in absence of the Brexit vote. 

Thirdly, despite the UK’s Trade and Cooperation Agreement (TCA) with the EU that avoided cross-border tariffs and provided the legal basis for future co-operation, there has been a clear sluggishness in UK-EU trade that has not been fully offset by UK trade with the Rest of the World. The Bank of England estimates that this reduced trade density, combined with the additional costs detailed above, will knock around 3.25% off the size of the economy over the long term. Most of this impact is already visible in the data since 2016.

But there are also some economic events that have been blamed on Brexit – but where the data is far less conclusive. The current cost of living squeeze is one such example. Inflation rates are high around the world as a rapid rebound from the COVID pandemic has coalesced with supply chain disruptions, changing worker and consumer preferences, and war on Europe’s eastern border. Amidst this extraordinary noise the marginal impact of Brexit – if there is one – is very hard to decipher.      

So, what does this all mean for what happens next? Despite the rhetoric accompanying the 2019 General Election, Brexit as an issue was never done. Arguably it never will be. A dynamic relationship with the UK’s closest geographic and cultural neighbours was inevitable. Whatever the wisdom of Ellwood’s suggestion it did illustrate that any attempt at a “line in the sand” moment was futile. Each political and economic tide will wash such markers away and recast the debate between alignment and managed divergence.

Pro-Brexit Conservative MPs will be looking at the current controversy surrounding Boris Johnson as an opportunity to remake the case for greater managed divergence. On tax, on regulation, on unilateral reduction in tariffs and market access, on product and professional standards, there are gross economic opportunities to be secured from divergence. However, they also all come with costs to be netted off, and always have. For example, free trade Brexiteers argue big economic advantages are available to consumers from lowering import tariffs on food and moderating where EU sanitary and phytosanitary standards go beyond those of other global trading partners. These arguments are sound. However, these consumer gains are offset by potential short-term losses to UK farmers and the broader domestic food supply chain. One of the reasons these divergences have not been actively sought is that Ministers, from the Prime Minister and Chancellor downwards, cannot stomach the losses. Even a cheaper lunch, it turns out, is not a free lunch.  

So six years on the UK remains in something of an economic limbo. Failing to be one thing or another outside the EU. This is not to say it is destined to remain so. At some point economic governance will return to making decisions in the national interest, and the UK’s underlying economic advantages will come to the fore. This is as possible outside the Single Market and Customs Union as it is within it. The hope for businesses and workers is as more anniversaries pass, making those decisions on their economic merit – rather than their political salience – will become easier for whoever resides in Downing Street.

7th June 2022

Simon French

Managing Director, Head of Research