Anti-Brexit protester Steve Bray (L) and a pro-Brexit protester argue as they demonstrate in front of the Houses of Parliament in Westminster on January 08, 2019 in London, England.
Jack Taylor | Getty Images News | Getty Images
The UK’s growth prospects are even lower than Germany’s, whose economy is uniquely vulnerable to higher energy prices due to its dependence on Russian gas imports. The OECD said “lingering uncertainty” along with rising capital costs will continue to weigh on business investment in the UK, which has fallen sharply since Brexit.
The UK’s independent Office for Budget Responsibility (OBR) offered a bleak outlook, forecasting a 1.4% GDP contraction in 2023, even as the Bank of England and government are forced to tighten monetary and fiscal policy to contain inflation and prevent the economy from overheating. .
The OBR said in its economic and financial outlook Last week, its trade forecast reversed an assumption that Brexit would result in the UK’s trade intensity (the integration of the economy with the global economy) 15% lower in the long run than if the country had stayed in the EU.
Decreased trade intensity
In May, the Office of the Balance Sheet estimated that the UK’s new trade terms with the EU, set out in the Trade and Cooperation Agreement (TCA) that came into force on January 1, 2021, would Reducing productivity in the long run by 4% comparatively to the previous course had the UK remained in the EU.
The Bank of EnglandThe Cabinet’s Monetary Policy Committee issued a similar forecast. Michael Saunders, the former Bank of England policymaker, told CNBC on Monday that the main driver of weakness in the UK economy is the lower intensity of trade due to Brexit, which is dragging down growth. Productivity.
Saunders argued that there is “abundant evidence” that greater trade intensity – or greater openness to trade for both exports and imports – increases productivity growth.
“The UK has increased trade barriers with Europe and trade deals with other countries largely maintain the status quo of trade with third countries – there has been no significant net increase in the intensity of trade with non-EU countries,” he said.
“So the overall net effect has been a significant reduction in the intensity of trade in the UK, which you can see in the significant decline in both imports and exports as a proportion of GDP since 2019 compared to trends in other advanced economies and compared to trends that we’ve seen in previous years.”
British trade as a percentage of GDP has fallen from around 63% in 2019 to around 55% in 2021, while domestic productivity growth is also slowing. Both the Bank of England and the OBR estimate that the UK’s potential output has declined directly since the last quarter of 2019, and will endure weak growth over the next few years.
The New York-based Kroll Bond ratings agency downgraded the United Kingdom even before The disastrous mini-budget of former Prime Minister Liz Truss In September, the bond markets went into a tailspin.
Ken Egan, European Sovereign Credit Director at KBRA, told CNBC last week that Brexit marks a “watershed” for the UK, as it has exposed several structural weaknesses in the economy.
“Part of the reason for our downgrade was a long-term view that Brexit has been and will continue to have a negative impact on the UK from a credit perspective, in terms of everything from trade to government finances along with the macroeconomics of things.”
The KBRA, like the OBR, the Bank of England, the International Monetary Fund, the Organization for Economic Co-operation and Development and most economists, believe growth will be lower in the medium term as a result of Brexit.
“Trade has really suffered, the currency has weakened but we haven’t seen a parallel improvement with trade, investment has really been the weak point since Brexit, business investment has deteriorated sharply already,” Egan explained.
“If you compare inflation in the current dynamic to the rest of the world, basic services and commodity inflation in the UK appears to be much higher than in the rest of Europe. It is an idea that even if the energy crisis ends tomorrow, you will still have inflation pressures that are more constant in the UK.”
General mood changes
Saunders said that while part of the decline since the last quarter of 2019 is due to the coronavirus pandemic, Brexit has also had a role in increasing trade barriers with the EU for businesses since the start of 2021.
He suggested: “If you don’t want to completely reverse Brexit, you can still go for a softer Brexit than the UK has chosen to do.”
“The UK pretty much went into the hardest Brexit and that was an option, we could have left the EU but we’d gone to a form of Brexit that would have put fewer barriers to trade and the intensity of trade would have suffered.” Less, productivity will decrease over time.
New Prime Minister Rishi Sunak’s government is expected to continue friendlier relations with the EU than any of his predecessors, Boris Johnson and Liz Truss. However, both the Conservatives and Labor have ruled out any return to EU-allied institutions for fear of disenfranchising voters in key pro-Brexit constituencies.
However, recent polls indicate that the public mood may be starting to shift. A YouGov poll earlier this month showed that Fifty-six percent of the population said Britain was “wrong” to vote to leave the European Union In 2016, that compared to 32% who said it was the right call.
The 24-point deficit was the largest in the series dating back to 2016, and nearly a fifth of Leave voters now believe Brexit was the wrong decision, also a record.