Brexit damage: Is EU exit now hitting UK’s economy harder than COVID?

The British opposition leader Sir Keir Starmer has said there is no going back on Brexit, in a speech earlier this week.

Instead, he offered a new slogan as part of a drive to ensure Britain thrives: “Make Brexit Work”.

“There are some who say ‘we don’t need to make Brexit work — we need to reverse it’,” the Labour leader told the Centre for European Reform (CER). “I couldn’t disagree more.”

“Let me be very clear. Under Labour, Britain will not go back into the EU. We will not be joining the single market. We will not be joining a customs union.”

It represents a major policy shift for Starmer — who in the run-up to Brexit called for a deal to be put to a second referendum, and lauded the benefits of the free movement of workers, now consigned to the past.

It also further distances the country’s current direction from the fiery debates and deadlock in the aftermath of the 2016 referendum, with the two largest parties firmly wedded to the UK’s departure from the EU. 

But the change comes as for the first time, economists are separating the economic damage done by Brexit — under the terms Boris Johnson’s government negotiated — from that wrought by the COVID pandemic.

UK economy ‘lagging far behind peers’

In June, a study by the CER’s Deputy Director John Springford examined the economic cost of the UK’s departure from the EU so far, setting out to disentangle it from that of COVID-19.

“Now that many advanced economies have recovered and are close to — or above — their pre-pandemic level of output, we can compare Britain’s economic performance to its peers. The results are troubling,” he wrote.

Springford compared the UK’s performance since Brexit with those of countries with previously similar records.

His “sobering” conclusion is that in the final quarter of 2021, GDP (gross domestic product) was 5.2% smaller, investment 13.7% lower, and goods trade 13.6% lower than what they would have been had the UK remained in the EU.

“The UK had a particularly deep recession in 2020, but it ended COVID restrictions sooner than many of its peers, thanks in part to starting its vaccination campaign early in 2021. That should have made its recovery from COVID faster than other countries, not slower,” he says.

“It should trouble Labour and the Conservatives that the economy is lagging so far behind its peers.”

Noting that the British finance minister is “raising taxes to their highest share of GDP since the 1960s”, Springford’s view is that “these tax rises would not have been needed if the UK had stayed in the EU (or in the single market and customs union)”. 

“It is difficult to disentangle the impacts of Brexit and COVID on the UK economy with precision. But it is hard to avoid the conclusion that Brexit has severely curtailed GDP, investment and goods trade,” he concludes.

Springford’s report has been criticised by Dr Graham Gudgin of the conservative think-tank Policy Exchange. “It will take many years to disentangle the effect of Brexit from all the other influences on the UK economy,” he wrote. “It can’t be short-circuited by creating an implausible and flawed methodology to draw premature conclusions.”

However, another report from June noted a decline in some aspects of Britain’s trade with both EU and non-EU countries that was “not explained by changes in the pattern of global trade during the pandemic”.

“The Big Brexit” by the Resolution Foundation think-tank and the London School of Economics (LSE) found that a drop in British “trade openness” — measured as a share of GDP — showed a much higher fall than in countries with similar trade profiles, such as France.

Brexit ‘has amplified’ inflation

Inflation figures from the Office for National Statistics (ONS) published in June put the UK’s rate at 9.1%, as measured by the consumer prices index. The figure for the eurozone in May was 8.1%, before rising to 8.6% in June according to Eurostat data.

Yet inflation in the UK is worse than in other high-income economies, as the Peterson Institute for International Economics noted in a report in May. This is despite the fact that Britain and its neighbours have suffered the same economic shocks from Russia’s war on Ukraine and soaring energy prices.

“Brexit has amplified the inflationary impact of a simultaneous common shock,” the institute says.

“By ending the free movement of EU migrant workers to the UK, the UK government has unilaterally cut the labor supply and its elasticity. By adding new tariff and nontariff trade barriers, the British government has slashed purchasing power and available imports, and it has created inflation during the staggered implementation of the Brexit deal.”  

Imports and exports: UK ‘missing out’ on post-pandemic recovery

“Despite tighter restrictions on the EU side of the border, UK goods imports from the EU have fallen by more than UK goods exports to the EU,” the UK’s Office for Budget Responsibility (OBR) reported in March.

UK services trade with the EU also fell more than non-EU trade relative to levels before 2019, it added, attributing that decline to the likely impact of the pandemic.

The OBR’s report came just over a year after end of the post-Brexit transition period. Despite a new EU-UK trade deal, Britain’s voluntary exit from the EU’s single market and customs union erected a plethora of non-tariff barriers such as customs declarations, rules of origin checks, regulatory controls and health checks.

“The seemingly paradoxical weakness in UK imports from the EU relative to exports to the EU… is likely the result of a combination of factors,” it said, giving as examples rising energy import prices and extra paperwork costs.

“Comparing our recent overall trade performance with other advanced economies suggests that the UK saw a similar collapse in exports as other countries at the start of the pandemic but has since missed out on much of the recovery in global trade,” it added, noting that the UK “appears to have become a less trade intensive economy”. 

Another study by the LSE, from April, found that Brexit caused ‘major disruption’ to both EU-UK exports and imports, with many British firms stopping trade with the EU.

To disentangle the effect of Brexit from other factors, such as the pandemic, the researchers compared the growth in the UK’s trade with the EU to the UK’s trade with the rest of the world.

Smaller UK exporters stopped selling to the EU as the costs of exporting increased, while larger UK firms which make up the majority of UK exports were not “severely hampered”, the report found.

The results of a survey of British and German companies by international accounting firm KPMG are summed up by its title: “The grave consequences of Brexit”.

Carried out at the end of 2021, it found that “two thirds admitted that the real impact of Brexit was more negative than thought at the start of the year”.

“The trade agreement between the EU and the UK … has strongly burdened the exchange of goods and services. 77% of surveyed companies have difficulties importing from Great Britain, 72% in exporting to the United Kingdom”, it said.

Eurostat data on trade in goods published in March said imports from the UK to the EU declined by 13.6% in 2021 compared to 2020, and by nearly 25% relative to 2019. The value of services imports from the UK was also down, by nearly 7% in 2021 compared to 2019 levels.

Northern Ireland: ‘Problem is lack of people not the Protocol’

The British government’s plan to rip up part of the international treaty covering post-Brexit arrangements in Northern Ireland has begun its path through parliament. It has already prompted retaliatory action from the EU and there are fears it could lead to a trade war.

The Northern Ireland Protocol is an integral part of the EU-UK divorce agreement. Unionists bitterly oppose the provisions keeping the province in the EU’s single market for goods and following its customs code.

The Institute for Economic Affairs (IEA), a right-wing think-tank, has estimated the annual cost of the arrangements to Northern Ireland to be £850 million (€993 million), much of it in support for businesses and extra red tape involved in trade from Britain.

But election results in May showed an overall majority of parties in favour of the Protocol. And a survey of businesses in Northern Ireland covering the first quarter of 2022 found similar approval for arrangements giving them access to both EU and UK markets.

It found that two-thirds had now adapted to new arrangements, albeit only partially implemented: up on the just over half who said the same at the end of 2021.

A report by Manufacturing Northern Ireland (MNI) in January on traders’ experience of the Protocol, a year after its partial implementation, found that almost two-thirds rated it as their “least challenging issue”.

Instead, almost 60% cited access to labour as their greatest concern, Northern Ireland having lost a third of EU migrants since the Brexit referendum of 2016. 

“The view of manufacturers is that it is the lack of people rather than the Protocol which is causing the biggest strain,” the report said.

What does each side say?

“Brexit has increased red tape, not decreased it. Trade is no longer as frictionless and dynamic as before. This holds true for both, goods and services,” said European Commission Vice-President Maroš Šefčovic earlier this year.

“One result of Brexit was the return of a customs border between the EU and Great Britain. This means paperwork for virtually every product shipped between our markets, and it means checks on thousands of goods being carried out on a daily basis,” the EU’s chief Brexit negotiator added.

“The view that Brexit is hitting us from an economic and trade perspective is generated by those with an axe to grind and cannot be supported by any objective analysis of the figures,” Lord David Frost, the UK’s former Brexit negotiator, said in a commentary for the UK in a Changing Europe think-tank in June.

“Anyone who draws firm conclusions from the (trade) figures is not really being honest with the data. What we can be confident about is that it doesn’t bear the catastrophism that some seek to attribute it,” he added.