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UK economy heavily hit by Brexit, new research finds

As Britain’s economic crisis spreads from spiralling inflation and high cost of living to weak productivity, experts believe the negative impact of Brexit has become more evident, after initially being masked by the COVID-19 pandemic.

In its recent economic and fiscal outlook analysis, the Office for Budget Responsibility said that Brexit “will result in the UK’s trade intensity being 15 percent lower in the long run than if the UK had remained” in the European Union. Trade intensity measures an economy’s integration with the world economy.

The new research by the London School of Economics found that leaving the EU had already cost UK consumers a total of £5.8 billion ($7.11 billion) over the two years up to the end of 2021, adding an average of £210 to household food bills.

Jim O’Neill, a leading British Sinologist and former UK treasury minister, said that while the UK faced the same headwinds globally (COVID-19, energy price developments, the splintering of global governance and climate change policies), it had two huge homemade dilemmas — weak productivity and Brexit.

“I think it looks clearer and clearer that Brexit is a legitimate reason why the UK is struggling. It is struggling both because of our very weak export performance to our biggest market, the EU, and significant labour shortages in so many sectors of our economy,” he added.

Aside from Russia, the UK is expected to be the worst performer among the world’s leading economies in the next two years, according to the latest economic outlook analysis by the Organization for Economic Cooperation and Development. The Paris-based organization has forecast that the UK’s GDP will fall by 0.4 percent in 2023 and rise by 0.2 percent in 2024.

Michael Saunders, a senior economic adviser at Oxford Economics, said, “Brexit has weakened the UK economy significantly since 2019, along with effects from the pandemic and the energy price shock.”

Saunders pointed out that the UK’s business investment had underperformed compared with other major economies since 2016.

“Reduced trade intensity is bad for long-run productivity growth. Brexit is likely to be a continued drag on the UK economy in coming years,” he added.

John Beirne, vice-chair of research at the Asian Development Bank Institute, a think tank, said: “Once the effects of the pandemic and the Ukraine situation gradually dissipate, global trade will eventually recover. This will further expose the effects of Brexit on the UK’s economic trajectory, given the constraints to engage fully in global trade recovery.”

Beirne said he believed this also had indirect effects on other parts of the economy, amplifying labour market frictions and productivity concerns and hampering potential output.

Inflation in the UK hit a 41-year high of 11.1 percent in October on the back of rising energy and food prices. In an effort to tackle the cost-of-living crisis and rebuild the economy, Jeremy Hunt, the country’s chancellor of the exchequer, outlined a£55 billion package of tax increases and spending cuts for the UK, which he said would allow inflation and interest rates to be “significantly lower”.

However, Dave Ramsden, deputy governor of the Bank of England, said at a recent conference at King’s College London that tax increases and spending cuts announced by Hunt were unlikely to persuade the central bank to moderate a future increase in interest rates.

Experts agree that over the medium term, the fiscal consolidation measures announced will help to alleviate debt sustainability concerns, but that this is not enough to put the UK’s economic growth on track.

“These measures aim to ensure that public finances will return to a sustainable path even if the economic trend remains sluggish,” Saunders said. “But the Autumn Statement did not really contain significant measures to address the UK’s poor underlying economic performance. The cuts to public investment will probably make it harder to lift medium-term growth trends.”

O’Neill said the UK desperately needed a different framework — “what you might call a more imaginative and modern golden rule to allow more ambitious government investment spending. It is the only way to really get out of our low productivity and investment trap,” he said.

The UK recession is expected to span a two-year period, from the third quarter of 2022 until the second quarter of 2024. “A peak in the tightening interest rate cycle and shift in the projected outlook for inflation could signal a turning point for the trajectory of the economy, whereby policy objectives would gradually pivot from combating inflation toward stimulating growth,” Beirne said.

Saunders said the economy should get some support if, as futures markets imply, wholesale energy prices drop over the next couple of years. “However, the economy’s underlying medium-term growth trend is unlikely to improve unless the government introduces a serious supply-side strategy consisting of, say, closer trade links with Europe, higher public investment and increased spending on education, skills and infrastructure,” he added.


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