One year ago, CEPR published a summary of the evidence on the economic impacts of Brexit on the UK economy (Portes 2022).  Since then, the British public appears to have made up its mind on this topic: two-thirds think Brexit has damaged the economy, while even among Leave voters only one in five think the impact has been positive (UK in a Changing Europe 2023). The vast majority of economists would agree (and many would add a resounding ‘we told you so’). But that does not mean that we fully understand how, and to what extent, Brexit has affected the UK economy.  In this column, I summarise the evidence across three key dimensions – trade, migration and investment – and then examine recent evidence on the overall macroeconomic impacts.

First, trade.  The most obvious and direct impact of Brexit was to reintroduce significant barriers to trade between the UK and its largest trading partner, so it’s here that the impacts should be the most salient. And indeed, the headline result is that the UK’s trade performance has suffered considerably. The Office for Budget Responsibility notes that the UK’s ‘trade intensity’ (trade as a proportion of GDP) has fallen significantly, and considerably more than other advanced economies (OBR 2023).

Most academic analysis suggests that Brexit is at least partly responsible. Using synthetic differences-in-differences, Du et al. (2023) find that Brexit has had a large and continuing negative impact on UK goods exports, with particularly large impacts on smaller firms.  Confirming this with more qualitative evidence, Bailey et al. (2023) find that the “imposition of new non-tariff barriers through Brexit has proved particularly challenging to smaller firms in manufacturing supply chains”.

However, Office for National Statistics trade data suggest that rather than seeing – as simple trade models of the impact of Brexit would imply – a sharp fall in our trade with the EU in both goods and services, goods trade has been weak across the board, while services trade has held up well (ONS 2023). Moreover, there is little evidence of a differential impact on UK exports to the EU compared to exports outside the EU (Freeman et al. 2022), although they also find that smaller firms have been more adversely affected.

There are plausible, but as yet unproven, explanations for this.  On the one hand, conventional trade models fail to take full account of how Brexit has impacted the UK’s participation in global supply chains (Baldwin 2014). On the other hand, strength in service exports reflects the UK’s strong position in high value sectors like consultancy where there are few barriers to trade and where the pandemic has actually helped normalise the remote delivery of services (Hale and Fry 2023) .  To further complicate the issue, there are numerous anomalies in the data. So while it’s reasonable to conclude that Brexit has damaged the UK’s trade performance, both the magnitude and the mechanisms remain open to question.

Second, immigration.  Again, the obvious and direct impact of Brexit was to end free movement, and there’s no doubt that has restricted labour supply – net immigration from the EU, which peaked at over 200,000 a year at the time of the referendum, is now negative. That in turn has had, as predicted, some negative impacts both on specific sectors and the flexibility of the UK labour market as a whole (Portes and Springford 2023).  The main impact has, again as predicted (Portes 2021), mostly been higher prices and reduced output in the affected sectors, rather than sharply higher wages. Indeed, it is notable that recent wage growth has actually been stronger is sectors such as finance than in sectors more directly affected by reduced migration flows (Bank of England 2023). 

However, what was not predicted was the sharp rise in immigration from outside the EU, both for work and study, which – in numerical terms at least – has more than offset the reduction in EU migration.  This has been driven by a number of factors, especially the relative liberalism of the post-Brexit system, refugee flows, and growth in international students (UK in a Changing Europe 2023b).  While not all are strictly ‘Brexit impacts’,  this shift in both the nature and national origin of migrants is very much consistent with the stated objectives of the new system (Portes 2023a). From this perspective, the short-term economic damage seen in sectors currently undergoing a painful adjustment process to the end of free movement will be more than offset by the longer-term benefits of shifting towards more selective, higher-skilled migration.  While it’s too soon to tell whether these will materialise, again the picture is more nuanced than simply observing that Brexit has reduced migration from the EU. ..

 moer at CEPR