Since the Brexit vote in 2016, the British economy has underperformed relative to the pre-Brexit trajectory as well as relative to its peers, and it will likely to continue to underperform in the next few years, even though the political implications of weaker economic growth will be limited and will not change the political elites’ attitude towards rejoining the EU. Following World War II, the British economy used to be referred as the “sick man of Europe” characterized by low economic growth, high government debt, stop-and-go macroeconomic policies and general underperformance compared to its Western European peers. While many factors contributed to the UK’s disappointing economic performance, an important factor was the UK’s reliance on the Commonwealth and its late joining of the European Community, which would have exposed British industry to greater competition from other advanced economies and helped increase UK productivity. While France was experiencing its trente glorieueses and Germany its Wirtschaftswunder, the British economy, and especially British industry, was undergoing relative decline. Hence the moniker “sick man of Europe.” The combination of joining the European Community in 1973 and Thatcherite economic liberalization, starting in the late 1970s, helped revive the UK’s economic fortunes and put it on a more favorable economic trajectory, until 2016. Empirically, it is difficult to disentangle the relative importance of European economic integration and domestic economic liberalization. Between 1961 and 1980, French real GDP growth averaged 4.7%, compared to 2.7% in the UK. Between 1981 and 2016, the UK economy averaged real GDP growth of 2.3%, compared to 1.8% in France and 1.7% in Germany.
The decision to leave the EU and the Common Market has had a material cost to the UK economy in terms of lost output, while the offsetting benefits have thus far disappointed, translating into a tangible UK underperformance relative to its pre-Brexit growth as well as its European peers. Long-term economic growth is a function of many factors, including demographics, savings and investment levels, technological innovation, macro-economic and regulatory policies as well as international trade integration. And there are different ways of measuring economic performance by, for example, accounting for differences in demographic changes or levels of per capita income. However, both relative to its performance pre-Brexit and its relative economic performance vis-à-vis its European peers, France, Germany and Italy, the UK economy has lost ground in recent years. The five-year real GDP growth in the UK in 2016 was 2.4%, significantly higher than in France, Germany, Italy and the US. It has since fallen to 0.8%, lower even than Germany’s five-year average real GDP growth and only half of the US’s.
The consensus among economists is that the UK is significantly worse off than it would have been if Brexit had not happened due to lower investment, lower economic confidence and higher costs of doing trade with its most important trading partner, the EU. In 2021, the UK government’s Office of Budget Responsibility (OBR) projects the economic costs to be 4% of GDP lower in the long run. In 2024, Goldman Sachs estimated that the UK economy underperformed its peers by 5% since 2016, though the actual impact may have been 4-8% of real GDP, relative to a non-Brexit scenario. The UK has also experienced higher inflation than its European peers. UK prices today are 31% higher compared to 2016, compared to 24% in Europe. In 2023, business investment, the major driver of economic and productivity growth, was only 6% higher than in 2016. In the United States, it was up 25%. Major UK trade deals remain without reach (US, China) and trade agreements reached since 2016 have had a negligible economic impact. Finally, while Britain has historically lagged its peers in terms of business investment, it has underperformed very dramatically in recent years. ·
Britain’s economy will continue to underperform, but this is unlikely to change the elites’ attitude towards EU membership, even though a Labour government will be more inclined to seek greater cooperation with the EU. The Tories’ quest for “Singapore on the Thames” has remained elusive. The UK has a competitive advantage is in high-value services, helped by geography, agglomeration effects, English law etc. While it makes sense for the UK to focus on trade services liberalization with third countries, the government has made very little progress. The EU will remain the UK’s dominant trade, followed by the United States. Much lower levels of trade with other countries mean that gains from trade liberalization will be very limited. As of 2022, 43% of UK merchandise exports went to the EU, 12% to the United States. In terms of services trade, the EU is less important, accounting for 37%, compared to 28% for the United States. For reference, unusually for a large economy, the UK is highly dependent on services exports (services: USD 490 bn vs merchandise: USD 530 bn). High-level trade agreements on services can be particularly difficult to reach given that it significantly affects non-tariff barriers. The UK has also made little progress on domestic regulatory reform in party because to retain access to the EU market makes it difficult to significantly liberalize parts of its regulatory regimes.
The outlook for growth-boosting was always and will remain dim. A free-trade agreement with the United States is not going to happen because Washington does not do free-trade agreements anymore. A free-trade agreement with China, the world’s third-largest economy, is not on the agenda. Negotiations with protectionist-leaning India are proving difficult. There will be little economic uplift from international trade negotiations. Except for the United States and China, there are no trade deals to be had that would make a significant difference to UK’s medium- to long-term economic growth. While the Indian economy is growing quickly, its economic size in nominal GDP terms is relatively small compared to the US and China and UK trade is small and would only increase from a very low base, not to mention that the India will be reluctant to open some its services substantially to UK exports. The UK is set to join the CPTPP this year, but even here the economic benefits will remain modest given that the UK already has free-trade agreements with virtually all members (except Malaysia). The OBR estimates a GDP gain of 0.04% over the next 15 years.
Economic reasons as well as shifting public attitudes towards cooperation with the EU/ EU membership will over time lead the UK to seek greater economic cooperation with its largest trading partner, the EU. UK public opinion has become more pro-EU membership in recent years. A November 2023 YouGov poll showed that 57% of Brits would support the single market if it allowed for a resumption of the free movement of people. Roughly 20% opposed rejoining the EU. The poll also showed that nearly ¾ of Britons want closer ties with the EU. Support for rejoining the EU is greater among Labour than Conservative voters. But this will be slow incoming and it will not compensate for the losses caused by Brexit for the foreseeable future.
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