The Office of Budget Responsibility (OBR) provides an independent expert analysis of the state of the UK economy and the budget plans announced by Jeremy Hunt last week. The political comment and press coverage following the announcements paid little attention to their view on the economic impact of Brexit. However, the report is clear and striking:
- Brexit has lowered UK productivity as the OBR predicted
- It is too soon to calculate its full impact, which will increase over time
- Most British business which export or import report increased costs as a result
This makes the economic challenges facing any government much more demanding. Here are the key extracts:
Productivity down
“Since the June 2016 EU referendum, our forecasts have assumed that the volume of UK imports and exports will both be 15% lower than if we had remained in the EU.We assume that the resulting reduction in the trade intensity of GDP will lead to a 4% reduction in the potential productivity of the UK economy (relative to remaining in the EU), with the full effect felt after 15 years. A decline in trade intensity plausibly lowers productivity because trade, among other channels, fosters competition and allows countries to specialise in activities where they are relatively more efficient.”
Too soon to know the full impact
“The Trade and Cooperation Agreement (TCA), signed in December 2020, set the terms of the post-Brexit trading relationship between the UK and EU. However, the application of the TCA remains ongoing, with the UK implementing physical inspections on imports from the EU from April 2024 and further declaration requirements from October 2024.
Overall, our assumptions about the impact of Brexit appear to be broadly on track and recently published studies are also broadly consistent with these estimates. However, it remains hard to draw firm conclusions given the challenges of disentangling the simultaneous impacts of Brexit, the pandemic, and other geopolitical developments affecting UK and global trade. Trade data are also volatile and prone to revision, particularly trade in services. Moreover, the full implementation of the TCA will further increase barriers to trade in goods with the EU. We expect the total impact of Brexit to be realised several years after full implementation of these barriers. In the meantime, we will keep our Brexit assumptions under review.”
The UK’s trade recovery from Covid is slower than the EU’s
“Trade volumes in all advanced economies declined sharply at the height of the pandemic in 2020. However, UK trade intensity (exports plus imports as a share of GDP) has not recovered in line with other G7 countries since then. In the third quarter of 2023, UK trade intensity remained 1.7% below its pre-pandemic level from 2019. By contrast, it had risen 1.7% above pre-pandemic levels on average in the rest of the G7.
More stringent regulation of trade flows, the expectation of further regulatory tightening, and uncertainty over future trade policy may all have weighed on trade between the UK and EU over this period. Goods trade between EU countries and goods trade between the EU and the rest of the world grew more than a third between 2019 and 2022 in current prices. Meanwhile, goods trade between the UK and EU only grew by only around 10% over the same period. An ONS survey of businesses from early 2024 indicates around half of exporting firms and two thirds of importing firms have reported extra costs associated with the changes in regulation since the end of the transition period. Similarly, the Bank of England Agents’ survey suggests EU trade frictions have weighed on export demand and may compound as new UK-EU regulations come into operation this year.”
