Five years ago today the world awoke to find that the British electorate had narrowly voted in favour of leaving the EU. The pre-2016 era feels like another world: in many ways it was, not least because Covid has had an even more transformative effect on the political and economic landscape. Looking back, the impact of the Brexit shock remains vivid and neither Leavers nor Remainers have since covered themselves in glory. Regular readers will know I regret the decision to leave the EU, largely on economic grounds but also because the UK is no longer part of a block which amplifies its voice on the world stage. However, it makes little sense to replay the debates of the past five years.
A quick retrospective
Nonetheless, this week marks a good time to assess the impact of Brexit, giving rise to a number of retrospectives in the British press. One of the best commentaries I have seen is this one by always excellent Fintan O’Toole, who points out that the Remainers never had a big idea which could overpower the simple narrative of taking back control espoused by the Leavers. As he put it, “Leave offered some kind of an answer [to the question of what defined British identity] – albeit a very bad one. Remain barely recognised the question.” He also argues that the project was not subsequently weakened by the “political discourse [which] ought to have doomed it … [because] uncertainty about what Brexit would mean in reality allowed it to sustain its character as a gesture.”
As a summary of what has happened over the last five years that just about nails it. As an economist, my mistake was to try and offer economic arguments against Brexit – not that they are wrong, but the simple but powerful notion of “controlling our own laws and our own borders” was a much more compelling vision. The fact that this was and is complete tosh is irrelevant – it is difficult to argue against a messianic vision with mere facts. The bigger concern is not so much the losing of the referendum but the way the process of departure was subsequently conducted, as the government tied itself in knots to reconcile many of the irreconcilable arguments made during the campaign.
A consultative (non-binding) referendum was treated as a winner-takes-all event with little attempt to engage with the near-half of voters which opposed the outcome. Three years of intense political debate eroded trust in the political process and far from lancing the boil of Euroscepticism which David Cameron feared would swamp his Conservative Party, the divisions opened up by the referendum have if anything grown deeper. This in turn has weakened the ties that bind the United Kingdom and given support to Eurosceptic movements in continental Europe. As the historian Timothy Garton Ash has pointed out, we find ourselves in a lose-lose position and it appears that the culture war which has largely been confined to the US for the last 25 years has now washed up on European shores.
A look at the economics
From an economic perspective there are no good arguments in favour of Brexit. Imposing barriers to trade with our biggest trading partner has no merit. The government has been telling us since 2016 that the UK will be able to strike better trade deals with third countries than those drawn up by the EU. There is little evidence so far that this is bearing fruit. Most of the agreements that have been struck so far represent a rolling over of existing EU trade arrangements. The first trade agreement to be drawn up from scratch was the recently-announced deal with Australia. However the government’s own figures suggest that this will increase UK GDP by just 0.02% over the next 15 years which is, to all intents and purposes, zero. On the basis that “the additional trade barriers associated with leaving the EU” will subtract around 4% from UK GDP over that period, Britain needs 200 Australia-type trade agreements merely to offset what has already been lost. To the extent that distance is one of the biggest obstacles to goods trade, the Australia trade deal is a largely meaningless exercise.
That said, most people have not really noticed the economic impact of Brexit (though in fairness, most people have not travelled abroad since the Covid crisis hit). But many exporters have highlighted the difficulties resulting from the erection of trade barriers and although year-on-year comparisons are distorted by Covid effects, a pattern is emerging whereby trade with the EU has fallen by far more than with the rest of the world. A recent report by the Food and Drink Federation noted that UK food and drink exports to the EU in Q1 2021 were 28% lower than a year ago whilst remaining unchanged to non-EU markets. On a more positive note, ONS aggregate data suggest that trade flows are slowly normalising but there is no doubt that UK-EU trade has taken a hit.
To obtain a handle on the joint impact of Brexit and Covid I have attempted a synthetic control exercise which constructs a synthetic (or “Doppelgรคnger”) GDP index for the UK based on trends in a panel of 23 other countries. The rationale behind the analysis is to use GDP outcomes in the control group to approximate what might otherwise have happened in the UK. When I conducted the analysis two years ago, I concluded that UK GDP was around 2.5% below what might otherwise have been expected which I attributed to Brexit-related uncertainty. Latest estimates suggest that GDP in 2021 Q1 was almost 10% below the synthetic indicator.
As can be seen from the chart, the UK began to underperform during 2017 as Brexit-related uncertainty kicked in and by Q1 2020 GDP was 4% below the synthetic control index which is in line with estimates made in 2016. However this pales into insignificance compared to the impact at the start of 2021. It is likely (but not certain) that the Covid-related output collapse contributed most to this underperformance and we will only be able to assess the impact of Brexit once the Covid shock dissipates.
Markets giving the benefit of the doubt
Despite this poor performance, markets have given the UK the benefit of the doubt with sterling trading at around 1.39 against the USD versus 1.36 at the start of the year (a gain of around 2%). In a similar vein, GBP is up around 5% versus the EUR whist the BoE’s broad effective exchange rate has appreciated by 4.1% since the start of the year. Sterling is still a long way short of where it was on 23 June 2016 (6.3% down on an effective basis) but it does seem to be moving in the right direction. UK stocks also continue to look cheap on an international comparative basis and there has been much discussion in recent months that the relative post-Brexit stability represents a good time to buy into the UK market.
To the extent that Brexit has not represented a seismic shock, there are good reasons why international investors might want to dip their toe in a market they have shunned in recent years. To the extent that much of the recent underperformance was the result of self-inflicted policy errors, so long as the government can avoid the mistakes of the last three years there may be some scope for catch-up. But the truth is we do not know how Brexit will pan out nor what the final balance of costs and benefits will be. Whilst Brexit has not proven to be a seismic economic event it may well prove to be a boiled frog problem with the cumulative effects building up over time. As it fades from the forefront of our consciousness and ceases to be the headline-grabbing event that has shaped the news agenda over recent years the devil will continue to make its presence felt in the economic detail.
No comments:
Post a Comment