Brexit disruption in first weeks of year is sign of more to come, economists warn

Disruption to trade seen in the first weeks of Brexit cannot be dismissed simply as “teething problems”, but represents the first signs of structural issues which will cut UK GDP for years to come, senior economists have said.

Although hard figures on the cost of quitting the single market and customs union will not emerge for a few months, experts speaking to The Independent said they had seen nothing during the first six weeks of 2021 to persuade them to amend forecasts of tens of billions of pounds of damage to the economy over the coming years.

The gloomy assessments came after the European Commission released the first formal analysis of the impact of Brexit to be compiled since the transition out of the EU’s structures on 1 January.

This predicted a 2.25 per cent hit to the UK economy by 2022 – equivalent to £40bn in lost growth over two years and more than four times the negative impact on the EU. 

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Boris Johnson’s government has refused to produce its own impact assessment of the Trade and Cooperation Agreement which the prime minister sealed on Christmas Eve.

Forecasts of a long-term hit to GDP as a result of Brexit were dismissed as “Project Fear” by Leave campaigners during the 2016 referendum campaign.

But Andrew Goodwin, chief UK economist at Oxford Economics, said that it was precisely the “non-tariff barriers” of additional form-filling, queueing and regulatory obstacles to trade identified by those studies which are now hitting sectors from fisheries to parcel delivery to financial services.

“All the reasons why studies like ours said that there’d be a hit to GDP are now becoming quite obvious,” he said. “And they are playing out pretty much as we said they would. What we’re seeing now in terms of delays and the cost of doing business are exactly what people like ourselves tried to model when we did our studies.

“The onus now is on the government to find ways of boosting growth in other ways.”

Rather than teething problems, the difficulties now being experienced are “the inevitable consequences of leaving the single market and the customs union”, he said. 

“It’s now up to businesses to decide how they how they adapt to that. Either you keep going as you are and accept the delays as a fact of life or over time you change where you produce, do more of one thing in the UK and more of something else in the EU.”

Oxford Economics has previously forecast UK GDP will be around 3 per cent lower in the long term because of the gradual unrolling of Brexit impacts like reduced trade, loss of foreign direct investment and declining competitiveness.

And Mr Goodwin said that so far there was no indication that these expectations were misplaced: “Certainly we are heading to the sort of outcomes most of our studies forecast. We’re pretty happy with our estimate that we made back in 2016, and we see no reason to change it.”

Thomas Sampson, associate economics professor at the LSE, has predicted a 36 per cent fall in exports to the EU over the next decade.

He said it was too early to claim that economists’ forecasts been “validated” by the experience of recent weeks. The first tranche of hard data on exports is not expected from the Office for National Statistics until mid-March, and the full impact may not be known for years to come, he said.

But he said that anecdotal evidence from exporting businesses so far was “indicative that the change in relations is causing problems at the border”.

He said: “The evidence that there is some disruption is what you would expect, but how big the effect will be remains to be seen.

“At the moment we’re seeing what happens when you put in a customs border for UK exports to the EU. In July, we actually put in the customs border for UK imports from the EU. And then the other thing economists think is going to affect trade in the long run is, as the UK diverges from the EU in terms of policy and regulation that that will make it harder to trade.”

Dr Sampson said there was “some truth” in ministers’ description of disruption at the borders as “teething problems”, as companies would certainly get to grips with the additional form-filling as time went by.

But he said: “There are also permanent changes which are going to make trading harder, even once everyone understands the new system.

“You might need a staff member whose job it is to fill in those forms and that’s an additional cost for businesses. It’s going to take longer to cross the Channel. As we start to see regulatory divergence, potentially you have different standards on either side of the channel which imposes an additional cost. 

“Those are the kind of things that will be permanent rather than just teething problems.”

King’s College London political scientist Prof Anand Menon, said he remained confident in the forecast of a 7 per cent hit to GDP over the next decade made by the UK in a Changing Europe think tank which he heads.

The problems reported over the last month and a half were “pretty much as we expected”, with the exception of the additional uncertainty generated by Covid.

“Some of it is teething problems, but the vast majority isn’t, and you’ve got to weigh the fact that the full gamut of checks isn’t even there yet, as controls on imports don’t come in until July,” he said.

“I don’t think you’ll find any economist who says ‘We need to change our forecast because of what we have seen since Brexit happened’,” Prof Menon told The Independent.

“One of the interesting things is you know you have this raft of forecasts that came out during the last four or five years. No one has seen it as necessary to revisit those forecasts. That tells you something, doesn’t it?

“We’re talking about long-term structural changes to the way we trade. The barriers that people expected are going to be there.”