The economic impacts of Brexit on the UK are still widely debated; however, most research suggests that it has had a negative effect, the extent of which is still disputable
Summary
- Most economics research shows that Brexit has had a negative impact on the UK, but the scale and scope of this impact is keenly debated.
- From research conducted to date, it appears that Brexit has more negatively impacted goods than services sectors.
- The impacts are also geographically uneven, with London typically less negatively impacted than other parts of the UK.
- Care needs to be taken when discussing these findings due to data limitations and the difficulties of separating the impacts of Brexit from other macroeconomic changes, such as the Covid-19 pandemic and the Russian invasion of Ukraine.
- Outside the single market, the UK can now set its own regulatory frameworks for services. The government intends to use this freedom to increase the UK’s competitiveness by tailoring regulation to the specific needs of the UK economy, particularly in areas such as financial services, technology and green growth.
- As yet, it is too early to assess the success of this strategy but the more the UK diverges from the EU, the less likely the prospects for building on the Trade and Cooperation Agreement and for deepening trade with the EU.
- The UK can now sign new free trade and bilateral agreements with other countries. However, trade agreements do not typically liberalise trade in services to the same extent as in goods, and services trade is typically greatest with geographically proximate partners. As a result, offsetting any EU trade lost as a result of Brexit with that with non-EU countries will be a challenge.
It is now four years since the UK left the EU at the end of the Brexit transition period. During that time, the terms of UK-EU trade is governed through the EU-UK Trade and Cooperation Agreement (TCA). It is still relatively early on in the implementation of the TCA to fully assess its economic impacts of Brexit on the UK economy. This means that the UK is still in the early stages of the Brexit process and there remains considerable uncertainty and public and political debate concerning the economic impacts of Brexit. This uncertainty has been compounded by two further major changes that are impacting the UK economy post-Brexit: the impact of COVID-19 both in terms of initial lockdowns and its longer-term effects in terms of decreased labour market participation; and the economic impacts of the war in Ukraine, which has led to significant inflation driven by rising energy prices.
Untangling the economic impacts of COVID-19 and the war in Ukraine from Brexit is critical if the economic impacts of the UK’s new trading arrangements with the EU and the rest of the world are to be fully understood. More research and data is being conducted across a range of disciplines, including economics, sociology, legal studies and geography, that aim to do precisely that. Examining some of these research highlights provides a valuable starting point for beginning to understand the impact of Brexit on the UK economy.
Before examining the real-world impacts of the TCA, it is helpful to step back and set out what economists anticipated the impacts of Brexit on the UK economy to be. This is important because during the period of EU membership since 1973, UK economic growth and GDP per capita grew as the economy developed greater trade and capital flows with the EU alongside greater migration. This gave rise to arguments from leading economists that reduced access to the EU’s single market, alongside uncertainty, which would likely reduce international investment into the UK, would likely lead to lower wages, a lower sterling rate, and the need for higher taxes or reduced investment in public spending.
Crucially, however, the economic benefits of EU single market membership were not distributed evenly across the UK. Whilst London and the South-East benefited from marked increases in financial and related professional services activity in particular, provincial regions did not see the same GDP growth. As such, the period of UK EU membership did not reverse the long-term pattern of marked regional differences in economic performance across the UK (Hall 2009). Research has argued that voters living in places that had not benefitted from rising GDP at the national level, which were also often the places that were most impacted by austerity policies in the 2000s, were influenced by these experiences and registered this in part through a Leave vote.
However, the role of economic experts, and forecasting in particular, has been the subject of continued debate and criticism since the Brexit referendum in 2016. In part, this stems from early initial forecasts of the economic impacts of Brexit that predicted a negative economic impact that would be felt relatively quickly, driven by negative impacts on financial markets, and consumer and business confidence.
The most negative elements of these initial forecasts did not materialise by enlarge. On the one hand, the pound did fall largely as expected but the predicted house price fall did not materialise. Similarly, the labour market remained relatively strong, and there was a slight fall in unemployment.
However, the longer-term predictions made at the time of the referendum, particularly concerning the impacts on trade and migration, have been more accurate.
In order to understand these impacts, the nature of the TCA itself needs to be set out. Broadly, the TCA does more to liberalise goods trade between the UK and the EU than it does for services trade. This is significant because services have historically been a strength for the UK economy whilst goods have dominated in the EU. The TCA provides zero tariffs and quotas on goods but very little around the mutual recognition of regulatory standards or to support labour mobility which are important in services.
In terms of goods trade, following the implementation of the TCA, research shows a 25% decrease in UK imports from the EU compared to imports from the rest of the world. Their research suggests a smaller and more temporary decrease in UK exports to the EU, although they report a large decrease in the number of trade relationships between UK exports and their EU counterparts. This suggests that smaller firms may have been more likely to decrease their exporting activity to the EU compared with larger firms who may have had more capacity to address any additional costs that they incurred with exporting to the EU.
In terms of services trade, the quality of data is not as strong as it is for goods. In services, there is evidence of a decline in UK services exports to the EU in the immediate period post-referendum, prior to the implementation of the TCA. This has been placed at around 6% in 2019. In terms of financial services, in particular, that are especially important in the UK, there is evidence that around 10% of total banking assets have moved to the EU, with a smaller proportion of jobs relocating.
Taken together, this analysis suggests that the early economic impacts of Brexit on the UK economy do not neatly follow the estimates made by economists immediately following the referendum. There have been negative impacts on trade, which can be largely separated from the impacts of COVID-19 and the War on Ukraine. Crucially, the devil is in the detail with such changes varying significantly by economic sector and by location in the UK. Whilst Brexit is only in its early stages economically, it is clear that its impacts are sectorally and regionally variegated.
The economic impacts of Brexit: UK services
The UK is a services economy. Services make up 80% of economic output (Gross Value Added) and 82% of employment. Unlike in goods, the UK runs a trade surplus in services. Before the UK’s departure from the EU and the Covid-19 pandemic, the EU constituted close to 39% of UK services exports.
Four main ways in which Brexit is having an impact on the UK services sector can be identified.
First, under the Trade and Cooperation Agreement (TCA) agreed between the UK and the EU in December 2020, trade in services between the UK and the EU is now more difficult than it was during the UK’s membership, with new regulations and paperwork required for businesses to operate in the EU. Membership of the single market offers much more in the liberalisation of services trade than is typical of free-trade agreements. During the Brexit trade negotiations, the EU was clear that it would not allow the UK to retain selective benefits of single market membership, such as market access for financial services, while rejecting freedom of movement. Consequently, the TCA reduces barriers to UK–EU goods trade more than it does for services.
For some sectors, such as financial services and digital trade, decisions made in parallel to the TCA were more significant than the TCA itself. These decisions (what are known as ‘equivalence’ and ‘adequacy’ respectively) provide a potential framework for dialogue and greater UK–EU trade opportunities than are currently provided for.
Second, Brexit is having profound effects on the UK’s labour market. The ending of the free movement of labour precipitated a new UK migration regime and restrictions on mobility between the UK and the EU. These changes affect the ability of UK-based businesses to employ EU citizens and for UK service providers to travel to the EU for work. This is important given that services sectors such as hospitality and financial services employed significant numbers of EU citizens before the end of the transition period. The changes also make business travel and mobility from the UK to the EU more difficult through, for instance, the introduction of visa requirements. To date, this has particularly affected accountants, architects, performing artists and musicians. This is an area of considerable policy development, and these policy changes are likely to shape migration significantly in the future.
The third area in which Brexit is affecting UK–EU services trade is through UK domestic policy changes as the government exercises its new-found regulatory freedom. Thus far regulatory changes involved a combination of both divergence and convergence with the EU. The relative balance of these will take time to emerge, particularly as trends towards de-globalization and protectionism have increased globally since the UK left the EU.
The fourth impact arises from new free-trade and bilateral agreements that the UK signs with other countries. The government has been keen to stress the trade opportunities for the UK beyond the EU as part its ‘Global Britain’ agenda, but research shows that trade in services is typically greatest with geographically proximate partners, which suggests that offsetting any lost services trade with the with trade with non-EU countries is likely to be a challenge.
