Six years after the Brexit vote, what are the economic consequences?

All economic calculations are fraught with difficulty, but the impact of Brexit on the UK and European economies is at the outer limits of confusion. So let’s get the problems out of the way.

First, we don’t know the counterfactual, what would have happened had the UK not held the referendum on leaving or had it gone the other way. Next, because it has been so contentious, much of the analysis has been shaped, consciously or otherwise, by the political views of the people doing the work.

Then there has been the pandemic, which has distorted everything on a vastly larger scale than changes to the trade relations between the UK and the EU. There is the war in Ukraine, the full impact of which is still to feed through the world economy. And finally, in all economic relations there is always a tension between the short term and the long term: what appears to be initially positive may be negative after a few years, and vice versa.

If we accept all that, what can we say with some confidence? Let’s start with a general judgement. Leaving the EU has not been the catastrophe that some had feared, but it has led to considerable economic disruption and that has carried costs in loss of output. One of the best sources of independent economic judgement is the Institute for Fiscal Studies, and its commentary on the spring statement acknowledged that Brexit had slowed growth, on top of the slowdown that followed the financial crisis of 2008-09.

What seems to have happened is twofold. The uncertainties associated with Brexit have held down business investment, and exports to both the EU and the rest of the world have not recovered swiftly after the pandemic. The Office for Budget Responsibility (OBR) made this point in a report in March. Imports from the EU have fallen sharply, while imports from the rest of the world have climbed to their highest-ever levels.

So the UK has switched from buying from Europe to buying from other countries, but on the export side, flows both to Europe and to the rest of the world have been fairly weak. The OBR comments: “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.”

That is a puzzle and a worry. It is a puzzle because there should be no reason why exports to the rest of the world have been affected by Brexit either way. And it is a worry because export failure will widen the balance of payment deficit and further undermine the pound. Sterling has weakened since the referendum in 2016 against both the dollar and the euro. It was trading around $1.45 in May 2016 before the referendum and now is $1.23, though that has as much to do with the strength of the dollar as the weakness of sterling. Against the euro, it was around €1.25 and now is €1.16.

The effect of the weaker pound is very evident at the petrol pumps, for oil is a dollar commodity. More generally, the weakness of the pound is tending to push up import costs and hence inflation more generally.

On the other hand, the UK seems to have managed a reasonable recovery from the pandemic. According to a research briefing by the House of Commons published earlier this month, in the first quarter of this year the UK economy was up 0.7 per cent on the last quarter of 2019, far slower than the US (up 2.8 per cent), and a bit less than Canada (up 0.8 per cent), but better than France (up 0.3 per cent) and Italy (no change), and much better that Japan (still down 0.6 per cent) and Germany (down 0.9 per cent).

Of course, it is possible that the UK would have done even better had it remained in the EU – the counterfactual issue – but it has not been the underperformer that is sometimes suggested.

What about the bonus of not paying into the EU budget? Well, another House of Commons paper last week confirmed that the UK paid a net £12.6bn to Europe in 2020, the last year of full payments, and noted that the Treasury and OBR estimate there is an outstanding bill of £30-35bn to be paid over the next 30 to 40 years.

So the annual cost of our membership will certainly fall – and had we remained members the bill would have risen – but the saving is not that enormous in the context of public finances as a whole.

Other issues? The fears of an exodus of jobs from the City have been largely unfounded. There was an estimate that 75,000 jobs might shift to Europe. As it happens, the number seems more like 7,400, and earlier this year, Catherine McGuinness, policy chair at the City of London Corporation, told Deutsche Welle, the German broadcasting enterprise: “Many more thousands of jobs have been created as EU firms have shifted some of their operations to the City to continue to operate in the UK market.”

Brexit also does not seem to have led to the exodus of foreign students that had been predicted. According to the Migration Observatory at Oxford University, there was indeed a decline in EU applications from 99,160 in 2020 to 59,630 in 2021. But this was largely offset by rising applications from outside the EU, which climbed from 176,750 to 205,120. Migration overall seems to follow a similar pattern: fewer arrivals from the EU, but more from the rest of the world.

To keep up to speed with all the latest opinions and comment, sign up to our free weekly Voices Dispatches newsletter by clicking here

The picture, unsurprisingly, remains opaque given the chaos of the pandemic, but one thing is clear. The UK job market is still amazingly strong, and while that remains the case the country will remain a magnet for immigrants from all over the world.

My conclusion? I should disclose I was a Remainer, but one that acknowledged that in the long run there might be advantages to Brexit, and I absolutely accepted the outcome of the referendum. My view is that there have indeed been some serious costs to the business community, and hence to all of us. We are almost certainly a bit poorer, taking the country as a whole, than we otherwise might have been.

But there will also have been benefits that will take time to feed through, and the challenge will be to make the most of those. That means huge attention to detail, listening to the business and financial communities, and not picking unnecessary fights with the EU but being firmly independent. There’s a lot to play for, and we seriously need to lift our game.

Hamish McRae’s new book, ’The World in 2050’, is published by Bloomsbury 

To mark the six-year anniversary of the referendum on Britain’s membership of the EU, Voices brings you Brexit, 6 years on – a series exploring the impact of the vote to leave