Brexit: The Two-Year Update
The two years following Brexit have seen extraordinary turmoil in the world economy. While it is challenging to entirely distinguish the impacts of UK’s withdrawal from the European Union to that of the pandemic and the war on Ukraine, some economic implications have been indisputable.
According to the Financial Times, the UK is the only G7 economy still below its pre-pandemic size. Moreover, Bank of England Governor Andrew Bailey mentioned that the central bank predicts a long-run downshift in the level of productivity of over 3%. This has been the product of several factors, including lower than anticipated investment in the economy and decline in trade between UK and the EU.
Furthermore, one of biggest threats plaguing UK now is inflation and the cost-of-living crisis. Rising energy prices due to the war in Ukraine has been the major contributor to the UK’s 41-year high inflation rate in the past year. However, the impacts of Brexit in this regard are indisputable. An article by The Independent has reported that post-Brexit immigration rules have led to a shortfall of around 330,000 workers in the UK. The unemployment rate recently reached its lowest level since the mid-1970s. Loss of flexibility associated with the end to free movement of EU workers into the UK created a wedge between the demand and supply of labour and may have steepened the Phillips curve. Due to the tight labour market, firms struggle to hire workers, pushing up wages. To maintain their profit margins, firms charge more for their goods and services, thus leading to inflation.
Following the Brexit vote in 2016, the sterling depreciated significantly, raising import prices but failing to boost export competitiveness. This contributed to further worsening inflation in the economy as real wages fell, putting a burden on households. Additionally, the Office for Budget Responsibility had previously forecasted that Brexit would result in the economy losing 4% of its output and the evidence has been consistent with this. Firms who previously used to export to EU countries find it difficult to grow sales under new regulations and many are finding it difficult to obtain visas for staff - both highly discouraging investment. Economists suggest that while other countries also saw weak business investment during the pandemic, the effect was much worse in the UK.
The Financial Times reported at the end of 2022 that almost two years after Britain left the EU, the consensus of economists has been that Brexit has significantly worsened the country’s economic performance.