Brexits Impact on the UK Economy

Brexits Impact on the UK Economy –  Two-thirds of the British public believe that Brexit has hurt the UK economy. Among voters who supported Brexit, only one in five see a positive impact from the event. In this paper, we will examine the evidence on the impact of Brexit in three key areas: trade, migration and investment, and examine its overall macroeconomic impact. The impact on trade has so far been consistent with early predictions, while the impact on immigration has been minimal (possibly even positive), and the impact on investment is likely to be worse. Currently, the best estimates of the negative impact of Brexit on UK GDP range from 2% to 3%.

Brexits Impact on the UK Economy

lxnews – A year ago, the CEPR released a summary of the evidence on the economic impact of Brexit on the UK (Portes, 2022). Since then, the British public appears to have made up their minds on the issue: two-thirds think Brexit has hurt the economy, while among those who supported it, only one in five see the impact as positive (Britain in a Changing Europe, 2023). Most economists agree with this view, and some would argue that they had warned about it before. However, our understanding of how and to what extent Brexit has affected the UK economy is still limited. In this paper, I will summarise the evidence across three key dimensions: trade, migration and investment, and review the current evidence on the overall macroeconomic impact.

Let’s look first at trade. The most obvious and immediate impact of Brexit is the significant trade barriers between the UK and its largest trading partners, so this is where the impact is most pronounced. The headline results show a dramatic decline in the UK’s trade performance. The Office for Budget Responsibility notes that the UK’s “trade intensity” – which measures the proportion of trade to GDP – has fallen significantly, far more than that of other advanced economies (OBR, 2023).

Most academic analyses suggest that Brexit has at least partly contributed to this decline. In a study using synthetic difference methods, Du et al. (2023) find that Brexit has had a large and persistent negative impact on UK goods exports, with a particularly significant impact on smaller firms. Research by Bailey et al. (2023) also support this finding, showing that “the introduction of new non-tariff barriers through Brexit has been particularly challenging for smaller firms in manufacturing supply chains.”

However, data from the Office for National Statistics shows that, rather than experiencing a sharp decline in trade with the EU as would be expected from simple trade models, overall trade in goods has declined, while trade in services has remained resilient (ONS, 2023). Furthermore, there is little evidence of a differential impact on UK exports to the EU compared with those to other countries outside the EU (Freeman et al., 2022), although they also find that smaller firms are more negatively affected.
There are plausible, if unproven, explanations for the effects of Brexit. On the one hand, conventional trade models have not fully anticipated the impact of Brexit on the UK’s involvement in global supply chains (Baldwin 2014). On the other hand, the strength of services exports reflects the UK’s strong position in high-value sectors such as consulting, where there are few trade barriers and where the pandemic has actually led to the normalisation of remote service delivery (Hale and Fry 2023). This is further complicated by anomalies in the data. Thus, while it is reasonable to conclude that Brexit has hurt UK trade performance, both the magnitude and the mechanisms of this impact are open to question.

 

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Then there is immigration. One of the most immediate and visible impacts of Brexit has been the end of freedom of movement, which has constrained labour supply – net immigration from the EU, which was over 200,000 per annum at the time of the referendum, has now turned negative. As predicted, this has had a negative impact on certain sectors as well as on the flexibility of the UK labour market as a whole (Portes and Springford 2023). The main effect, as also predicted (Portes 2021), has been higher prices and lower output in the affected sectors, rather than significant increases in wages. Interestingly, recent wage growth has been stronger in sectors such as finance than in sectors more affected by reduced migration (Bank of England 2023).

What was unexpected, however, was the sharp increase in immigration from outside the EU, both for work and education. In numerical terms, this migration has more than offset the decline in migration from the EU. This phenomenon has been driven by a variety of factors, including the relative liberalization of the post-Brexit system, the refugee crisis, and the growth in international student numbers (Britain in a Changing Europe 2023b). While not all of these can be attributed directly to Brexit, the changes in the nature and sources of citizenship of these migrants are very much in line with the intended goals of the new system (Portes 2023a). From this perspective, the short-term economic losses felt in sectors adjusting to the end of free movement are likely to be offset by the long-term benefits of a shift towards more selective and highly skilled migration. While it is too early to say for sure whether this will happen, the picture that emerges is much more complex than simply noting that Brexit has reduced migration from the EU.

Finally, let’s talk about investment. The relatively low level of business investment in the UK predates Brexit. However, analysis of aggregate data and survey results suggests that Brexit has at least partly contributed to the very poor investment performance since 2016, with estimates suggesting that investment may have been around 10% lower than it would have been. This in turn could lead to a decline in productivity, leading to a decline in output of just over 1% of GDP (Haskel and Martin, 2023). One of the key questions here is whether this decline reflects, at least in part, the uncertainty created by Brexit. If so, we might expect some catching-up efforts.

 

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So what do we conclude from all this? First, the public view is correct: Brexit has hurt the UK economy. However, there is no doubt that the mechanisms and impacts are far more complex than economists can explain in macroeconomic or trade models, which often contain oversimplified assumptions. To simplify things a bit, we can say that the overall impact on trade is in line with current predictions, while the impact on immigration is likely to be less negative (perhaps even positive), and the impact on investment is slightly worse.

So what does all this mean for the UK economy as a whole? Estimates obtained using a synthetic counterfactual method (Springford, 2022), similar to the approach used by Campos et al. (2014) to assess the positive impact of EU membership on UK GDP, suggest a negative impact of around 5% since the vote to leave in 2016. However, recent criticism by Gudgin and Lu (2023) argues that “[Springford’s] CER doppelganger index does not provide a credible measure of the impact of Brexit.”