The cost of Brexit? A major blow to the UK!

12th December 2022
-IAM, News

Hugues Chevalier, Economist

Following the referendum of 23 June 2016 and the official exit of the United Kingdom from the European Union (EU) on 31 January 2020 and the transition period for foreign trade which ended on 31 January 2021, the first studies show, two years later, that the Brexit is very expensive for the United Kingdom. According to the Centre for European Reform, already at the end of 2021, GDP was 5.2% lower than in the non-Brexit scenario. This lower growth is due to several factors. Firstly, it appears that productivity would have fallen by between 2% and 5% between 2016 and 2019, as companies would have spent a lot of time and money reorganising their activities in preparation for the Brexit instead of spending them on their ‘normal’ activities. In addition, the implementation of customs and non-customs barriers with the British Isles’ largest supplier has caused a sharp rise in import costs which have been passed on to consumer prices, particularly in the food sector with a 6% rise in prices due to Brexit alone. In addition, the departure from the country in 2020 of nearly 100,000 EU workers has caused a labour shortage, leading to a surge in wages and, above all, weighing on the country’s potential growth. Finally, and perhaps the most negative impact, the implementation of the Trade Cooperation Agreement (TCA) which introduces quotas, new sanitary rules, etc. for imports and exports is causing a decline in trade between the UK and the EU. According to INSEE, the contraction of exports in value terms would even reach -14.3% between 2018 and 2021. And this decline is not due to the consequences of the health crisis, as British exports to the EU fell again in 2021, while there was a clear rebound in intra-European trade in goods. A similar trend is observed in the services sector (notably financial services) following the relocation of part of these activities to the EU. In the opposite direction, British imports from the EU would have fallen by 25% for the year 2021 alone following the introduction of the TCA. This contraction would also be due to the devaluation of the pound against the euro, which has made imports from the EU more expensive. The new British government therefore has every interest in renegotiating the TCA to limit the economic damage of Brexit to the UK economy.