Anti-Brexit protester Steve Bray (L) and a pro-Brexit protester 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
UK growth prospects are lower than even Germany, whose economy is unusually exposed to higher energy prices due to its reliance on Russian gas imports. The OECD said “prolonged uncertainty” along with higher capital costs will continue to weigh on UK business investment, which has fallen sharply since Brexit.
The UK’s independent Office for Budget Responsibility (OBR) offers a more bleak outlook, projecting a 1.4% decline in GDP by 2023, even though the Bank of England and the government have been forced to tighten the monetary and fiscal policy to contain inflation and prevent economic overheating. .
The OBR said in its economic and fiscal outlook last week that its trade forecast showed an assumption that Brexit would result in trade intensity in the UK (an economy in the integration of the global economy) being 15% lower than longer than if the country stayed. in the EU.
Decrease in trade intensity
In May, the OBR estimated that the UK’s new trading terms with the EU, set out in the Trade and Cooperation Agreement (TCA) which came into force on 1 January 2021, would reduce long-term productivity by 4% compared to the previous trajectory that the UK remains 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 a key driver of the UK’s economic weakness is the decline in trade intensity due to Brexit, which led to lower productivity growth.
Saunders argues that there is “abundant evidence” that increased trade intensity – or greater trade openness to both exports and imports – raises productivity growth.
“The UK has increased trade barriers in Europe and trade deals made with other countries largely maintain the status quo in trade with third countries – with no significant net increase in trade strength in non-EU countries,” he said. .
“So the overall net effect is a significant reduction in UK trade intensity, which you can see in the large drop in both imports and exports as a share of GDP since 2019 compared to trends in other advanced economies and compared to trends we have seen in previous years.”
UK trade as a percentage of GDP falls from around 63% in 2019 to around 55% in 2021, while domestic productivity growth is also slowing. Both the Bank of England and the OBR estimate that UK potential output will fall from the fourth quarter of 2019, and will endure anemic growth for the next few years.
New York-based Kroll Bond Rating Agency downgraded the UK even before former Prime Minister Liz Truss’ disastrous mini-budget in September sent bond markets 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 because it brings with it many structural weaknesses in the economy.
“Part of the reason for our downgrade is a longer-term view that Brexit will have and will continue to have a negative impact on the UK from a credit perspective, in terms of everything from from trade to government finance to the macroeconomic side of things.”
KBRA, like the OBR, Bank of England, International Monetary Fund, 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 have not seen an improvement in the growth of trade, investment is really the weak point since Brexit, business investment has really fallen,” explained Egan.
“If you compare inflation with the current dynamics around the world, the core services, core goods inflation in the UK seems to be higher than the rest of Europe. That is the idea that even if the energy crisis is over tomorrow, there you still have these inflationary pressures in the UK”
Shifting public mood
Saunders said that while part of the deterioration since the fourth quarter of 2019 is down to the coronavirus pandemic, Brexit also has a part to play as additional trade barriers to the EU for companies since the start of 2021 have been put in place. activity.
“If you don’t want to completely reverse Brexit, you could even go for a softer Brexit than the UK has chosen to do,” he suggested.
“The UK went for the hardest Brexits and that was an option, we could have left the EU but went for a form of Brexit that would put more barriers in the way of trade, the strength of trade could be -suffer less. , productivity decreases over time.”
The government of new Prime Minister Rishi Sunak is expected to maintain friendlier relations with the EU than either of his predecessors, Boris Johnson and Liz Truss. However, the Conservatives and Labor have rejected any return to EU-aligned institutions for fear of disenfranchising voters in key pro-Brexit constitutions.
Yet recent polling suggests that the public mood may be beginning to change. A YouGov poll earlier this month showed that 56% of the population said Britain was “wrong” to vote to leave the EU in 2016, compared to 32% who said it was right. call.
The 24-point deficit is the biggest in the series since 2016, and almost a fifth of Leave voters now believe that Brexit was the wrong decision, which is also a record.