30 November 2022

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

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.”

The Canadian former governor has been widely criticised for his use of this statistic, with Jonathan Portes, professor of economics and public policy at King’s College London, saying the apparently dramatic contraction stemmed from currency movements, not Brexit. But Portes also acknowledged that there is no doubt that the negative effects of Brexit can be seen both in UK economic data and in-depth academic work.

Before the 2016 referendum, Brexiters such as Lord Daniel Hannan, an adviser to the Board of Trade, worried that having close trade ties with EU held back the UK economy. Britain was “shackled to a corpse”, he said. But since the eve of the coronavirus pandemic, the UK’s economy has underperformed compared with every other G7 counterpart and it is the only one not to have recovered to its size in late 2019.

The OECD expects the UK’s performance over the next two years to be worse than any other advanced economy bar Russia.

A bar chart of cumulative growth in GDP between Q4 2019 and Q3 2022 showing that the UK has the lowest growth in the G7 for this period Though these comparisons provide many headlines, academic economists worry that such summary statistics might be polluted by specific UK-related Covid-19 weakness or energy shock effects...

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