Anti-Brexit protester Steve Bray (L) and pro-Brexit protesters argue as they demonstrate outside the Houses of Parliament in Westminster on January 08, 2019 in London, England.
Jack Taylor | Getty Images News | Getty Images
The UK’s growth prospects are lower than Germany’s, whose economy is uniquely exposed to higher energy prices due to its reliance on Russian gas imports. The OECD said “persistent uncertainty” and higher capital costs will continue to weigh on business investment in the UK, which has fallen sharply since Brexit.
The UK’s independent Office for Budget Responsibility (OBR) has offered a more gloomy view, predicting a GDP contraction of 1.4% in 2023, even as the Bank of England and the government are forced to charge monetary and fiscal policies to contain inflation and prevent overheating of the economy. .
The OBR said in its economic and fiscal outlook last week that the trade forecast reflected an assumption that Brexit will result in the intensity of the UK’s trade (the integration of our economy with the world economy) being 15% lower in the long term than if the country had remained in the EU.
Trading intensity plunging
In May, the OBR estimated that the UK’s new trade terms with the EU, set out in the Trade and Cooperation Agreement (TCA) to be implemented on 1 January 2021, would reduce long-term productivity by 4% relative to the previous trajectory, the UK had remained in the EU.
The Bank of England‘s Monetary Policy Committee issued a similar projection, and former BOE policymaker Michael Saunders told CNBC Monday that the key driver of weakness in the UK economy is reduced trade intensity due to Brexit, leading to lower productivity growth.
Saunders argued that there is “abundant evidence” that increased trade intensity – or greater openness to trade on both exports and imports – raises productivity growth.
“The UK has increased trade barriers with Europe and the trade deals it has made with other countries have only maintained the status quo of trade with third countries – there has been no significant net increase in the intensity of trade with non-EU countries,” he said. .
“So the overall net effect has been to reduce the intensity of UK trade, which you can see in the large decline in both imports and exports as a share of GDP since 2019 compared to the trend in other advanced economies and compared to the trend we’ve seen in recent years.”
UK trade as a percentage of GDP has fallen from around 63% in 2019 to around 55% in 2021, while domestic productivity growth is also weak. Both the Bank of England and the OBR estimate that UK potential output has fallen sharply since the fourth quarter of 2019, and will sustain anemic growth for the next few years.
New York-based Kroll Bond Rating Agency downgraded England even before former Prime Minister Liz Truss’ disastrous mini budget in September sent the bond market into a tailspin.
Ken Egan, director of European sovereign credit at KBRA, told CNBC last week that Brexit marks a “turning point” for the UK as it causes some structural weakness in the economy.
“Part of the reason for our downgrade is the long-term view that Brexit has had and will continue to have a negative impact on the UK from a credit perspective, in terms of everything from trade to government finances to the macroeconomic side of things.”
KBRA, like the OBR, the Bank of England, the International Monetary Fund, the OECD and most economists, believe that growth will be lower in the medium term as a result of Brexit.
“Trade has suffered, the currency has weakened but we haven’t seen an offsetting improvement in trade, investment has really been a weak spot since Brexit, business investment has really deteriorated,” explained Egan.
“If you compare inflation in the current dynamic to the rest of the world, core services, core goods inflation in the UK seems to be much higher than the rest of Europe. This is the idea that even if the energy crisis is more tomorrow. you will still have inflationary pressure closer to this in the UK”
Public mood shift
Saunders said that while part of the damage since the fourth quarter of 2019 was down to the coronavirus pandemic, Brexit also had a part to play in trade barriers with the EU for companies since the start of stymied activities in 2021.
“If you don’t want to reverse Brexit entirely, you can still choose a softer Brexit than the UK has chosen,” he said.
“Britain took the hardest Brexit and it is a choice, we can leave the EU but go to a form of Brexit that will put many obstacles in the way of trade, the intensity of trade will suffer less. , productivity will suffer less over time”.
New Prime Minister Rishi Sunak’s government is expected to pursue friendlier relations with the EU than those of his predecessors, Boris Johnson and Liz Truss. However, both the Conservatives and Labor have ruled out returning to EU-Block institutions for fear of disenfranchising voters in key pro-Brexit constituencies.
Yet the latest poll shows that the public mood may have started to turn. A frequent YouGov survey earlier this month showed that 56% of the population said the UK was “wrong” to vote to leave the EU in 2016, compared to 32% who said it was the right call.
The 24-point deficit was the largest in the series dating back to 2016, and almost one-fifth of Leave voters now believe Brexit was the wrong decision, which is also a record.