The Economic Impact of Brexit on the UK Economy

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Measuring the economic impact of Brexit on the UK economy is a difficult task, as estimates rely on assumptions that compare the economy’s recent record of growth with an estimate of how it would have performed had the British public voted to remain in the EU.

One thing that all economists seem to agree upon – despite their apparent differences – is that the Brexit vote two years ago certainly damaged the UK economy, with investment and household incomes both hit hard by a falling pound. The only thing that they disagree upon is the degree of damage and the length of the effect.

Estimates of Brexit’s pull-down effect range from around 1%-2% of GDP, or £20bn-£40bn a year.

By the end of the first quarter of this year, surveys indicated that the economy was 1.2 percent smaller than it would have been without the Brexit vote, representing a £24bn hit to the economy. This adds up to £450m a week in “Brexit costs”, up from £350m a week in an earlier December survey. Meanwhile, the UK has slumped from the top of the G7 league table to the bottom.

Overall speaking, economists are in agreement that the Brexit decision is likely to affect the UK’s economic growth adversely in the short term. Over the long term, results could get better as the UK’s new relationship with the EU and the rest of the world gets settled. Therefore, it is important to analyze the nature of this relationship and the deals that could be negotiated after the UK formally begins the Brexit process.

The key decision that will have a major influence on the UK’s economy is going to be whether the country will remain in the EU single market after Brexit. The EU is the world’s largest free trade zone, where goods, services, capital and labor move without hindrance. Theoretically, the UK will escape economic turmoil and continue to benefit from free trade and investment with the rest of Europe by remaining in the single market, despite exiting the EU.

In the event of the UK quitting the single market, trade barriers will be created with the EU leading to tariffs that will harm the UK’s economy until a new trade deal is negotiated. However, there is hope that the UK will be exempted from the free movement of people for up to seven years as part of the Brexit deal, giving it access to the single market while adjusting for immigration concerns. This would allow a trade to continue with the EU and reduce long term damage due to the higher costs of exports and imports.

Access to the single market may not guarantee access to financial markets since Brexit will severely limit London’s role as a financial and clearing hub for the EU. Banks would prefer to do their transactions within the EU, especially if France presents Paris as a more attractive alternative. This risk to the UK’s financial sector was clearly reflected in the sharp post-Brexit decline in the share price of many banks and represents the greatest danger to the UK’s economy.

On the other hand, giving up access to the single market may not spell all doom and gloom. For starts, it would allow the country to reduce externally imposed constraints on its economy, potentially providing major benefits. Trade within the EU is characterized by heavy duties on manufactured goods imported from outside the union, protectionist agricultural policies, expensive labor, and stringent environmental regulations. Brexit could help drive down the cost of imported manufactured goods, give the UK access to overseas markets, and reduce the need for UK businesses to comply with EU regulations. Brexit would also open up opportunities for the UK to trade with traditional partners such as Australia and New Zealand, as well as emerging economies such as India and China.

In conclusion, while Brexit’s short term impact on the UK economy has been difficult and has led to pessimistic forecasts, the long term impact of Brexit depends on decisions around the single market and may not be as damaging if managed wisely.