04 September 2019

Vox EU: The impact of Brexit on UK firms

This column uses a major new survey of UK firms to show that the anticipation of Brexit has already made its mark on the UK economy. It has gradually reduced investment by about 11% and decreased productivity by about 2% to 5% over the three years since the referendum.

To gauge the level of uncertainty that companies are facing due to Brexit, researchers use data from the Decision Maker Panel (DMP), which is a large and representative monthly survey of UK firms.1The survey was launched in August 2016 and now regularly receives around 3,000 responses a month. Data from the DMP match up well with both audited accounting data and official aggregate data from the Office for National Statistics (ONS). Both validate the quality of the data. 

Their key uncertainty measure from the DMP is the share of firms who rate Brexit as one of the top three sources of uncertainty for their business. We define this as our Brexit Uncertainty Index (BUI). It shows that uncertainty was high after the June 2016 vote: about 40% of firms rated Brexit as one of the three main drivers of uncertainty at this point. This rose further when the EU rejected the UK’s Brexit proposal at the September 2018 Salzburg Summit. The EU and UK eventually reached an agreement in November 2018, but the UK Parliament rejected it. As a result, the BUI remained elevated in the run-up to 29 March 2019, when the UK was originally due to leave the EU. After agreeing to postpone withdrawal from the EU until 31 October 2019, uncertainty started declining. But it still remained higher than it was in the first two years after the referendum and it increased again in July 2019. 

Firms with higher levels of trade, employment, regulatory and ownership links with the EU have reported significantly higher levels of Brexit-related uncertainty.

Authors find that the Brexit process has had a negative impact on the investment decisions of companies in the UK in the three years since the referendum. The impact on employment has been more ambiguous. [...] reduction of approximately 11% in the level of investment over three years. Researchers estimates suggest that the Brexit process can account for most of the slow-down in aggregate investment growth since the 2016 referendum.

[...] Overall, authors estimate that the Brexit process has reduced UK productivity by between 2% and 5%, in total, over the three years since the referendum (see Figure 3). The vast majority of this reflects within-firm effects which are estimated at between 1.8% and 4.5%, depending on whether the effects are allowed to vary by firm size (the productivity effects are estimated to have been biggest for smaller firms). Between-firm effects are estimated to have been much more modest and only lowered aggregate productivity growth by around 0.1pp a year since the Brexit referendum, or 0.3% in total over 3 years. 

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