Three years on from the withdrawal of the UK from the European Union, the implications of the deal have not exactly been clear-cut due to the devastation on the economy, that is – COVID-19. However, what is clear is that Brexit has not had the expected effect of narrowly reducing exports^[i] to the EU, resulting in more independence, but has instead reduced how open and competitive Britain’s economy is, which is said to reduce productivity and wages in the years to come – according to joint Resolution Foundation and LSE Research.

What were the main effects of Brexit?

Prior to the 2016 referendum, uncertainty arose surrounding its outcome, which led to a slowdown in investment decisions by 6 percentage points. Following the Brexit vote of 52%, the depreciation of the GBP provided a short-term boost to export revenues and made the UK an attractive destination for foreign investors. However, the prolonged uncertainty ensuing T. May’s activation of Article 50^[ii] and the eventual departure in 2020 dampened business sentiment, also greatly declining foreign direct investment (FDI)^[iii] in certain sectors. The manufacturing sector also witnessed reduced investment. For instance, the aerospace manufacturer Airbus warned that Brexit could potentially jeopardise its UK operations, which employ around 13,500 people.

What were the short-term macroeconomic costs? 

According to a 2017 FT analysis, the referendum outcome pushed up UK inflation by 1.7%, resulting in an annual cost of £404 for the average British household, and British national income also declined by 0.6% and 1.3%. However, these short-term macroeconomic costs were lower than expected as assessments assumed that the referendum results would create greater uncertainty in markets and reduce consumer confidence more than it did. Economists have compared short-term economic forecasts to weather forecasts, whereas the long-term economic forecasts are akin to climate forecasts.

What were the other concerns regarding Brexit?

One of the central concerns surrounding Brexit, was the impact on trade and the market due to the UK’s withdrawal from the EU’s single market and customs union, which meant the end of frictionless trade with its largest trading partner. The imposition of customs checks, and non-tariff barriers has increased administrative burdens, leading to higher costs for businesses like the fishing industry, which was a clear issue during Brexit negotiations, with constant disruptions due to changes in fishing rights and access to EU markets leading to increased bureaucracy and delays facing fish exporters. However, trade volumes resumed to pre-pandemic levels, but it could have been argued that trade would have continued to grow more if it wasn’t for Brexit and the dip in trade openness it caused. A glimpse at a graph from the OECD illustrating Total Trade as a share of GBP indexed at Q4=2018, compared with the rest of the G7^[iv] evidences the UK’s trade openness lagging behind G7.

Withdrawal from the EU also meant adjustments to policies on free movement of human capital and the introduction of a ‘points-based’ immigration system. The impact of Brexit on the labour market has been multifaceted as, on one hand, stricter immigration policies have led to labour shortages in some sectors, namely, the NHS. This has put upward pressure on wages and created challenges for businesses heavily reliant on migrant workers. On the other hand, the decline in net migration from EU countries, has also reduced competition for low-skilled jobs and potentially increased opportunities for certain segments of the UK labour force. According to the Centre for European Reform and UK in a Changing Europe, there are ‘330,000 fewer workers in the UK as a result of Brexit’.

Despite the electorate’s expectancy of greater sovereignty: more control of our democracy and control over our money that Brexit was to deliver. The disruption to trade, declining business confidence, the reconfiguration of the financial services sector and regional disparities pose considerable challenges for the current UK economy. It would be of upmost importance for policymakers, businesses, and society at large to adapt, innovate, and forge new trade relationships to mitigate the adverse effects of Brexit and ensure a prosperous future for the country.

Footnotes:

[i] Exports – send goods and services to another country for sale.

[ii] Article 50 - provides for a mechanism for the voluntary and unilateral withdrawal of a country from the European Union (EU).

[iii] Foreign Direct Investment (FDI) - purchase of an asset, such that it gives direct control to the purchaser over the asset.

[iv] G7 – Informal grouping of seven of the world's advanced economies.

Bibliography:

Brexit and the economy: the hit has been ‘substantially negative’ | Financial Times

Brexit has damaged Britain's competitiveness, and will make us poorer in the decade ahead

Brexit timeline: events leading to the UK’s exit from the European Union - House of Commons Library