This is the way our membership ends: not with a bang but a whimper. It’s hard to improve on TS Eliot in summing up the economics of Brexit. No single consequence has been explosive enough to register above the pandemic. George Osborne’s bombshell “DIY recession,” which was supposed to immediately follow a Leave vote, never detonated. Instead, the currency adjusted and the Bank of England acted to prevent an economic crunch. And yet the frustration from exporters and others is steadily becoming hard to miss.
A year ago, Prospect collated individual tales of trouble in cross-channel trade as Boris Johnson’s hard Brexit began to bite: dairy-to-door deliveries of Cheshire cheese running into £180 health certificates; luxury bedsheets from Paris getting entangled in red tape before they could reach British buyers. But there were few confident conclusions: we still couldn’t tell whether such cases were representative, or anything more than “teething problems” with the post-single market arrangements that had only started being phased in at the beginning of 2021. We are still awaiting full implementation: extra security declarations and checks on agricultural exports are being added throughout this year, and Minister for Brexit Opportunities Jacob Rees-Mogg has just delayed some import checks until even later. But we now know enough to go beyond the anecdotal phase of analysis.
In February, the British Chambers of Commerce found that half of exporters and manufacturers were facing difficulties with the new goods trading regime. The BCC summed up the problems as: “costs, delays, and confusion.” Some issues were about transition or implementation, but many related directly to “core provisions” of the Trade and Co-operation Agreement (Johnson’s final deal).
So what can we see in the official trade figures? The Covid shock—which knocked a third off total goods trade in spring 2020—still dominates the big picture, and recent methodological changes blur the last couple of months. But two things are now clear. First, Britain is not enjoying the sort of post-pandemic trade boom seen in many countries. Second, our EU trade in particular has struggled to bounce back to pre-Covid levels. Looking at the final batch of data for 2021, Thomas Sampson of the London School of Economics judged that Brexit had finally “hit home,” and “reduced goods trade with the EU around 15 per cent” relative to trade with the wider world.
That is broadly in line with the predictions of mainstream economists, including Whitehall’s own Office for Budget Responsibility (OBR). As the evidence began flowing in, they reported that it was “still consistent with our initial [2016] assumption” of a 15 per cent eventual reduction in total trade, compared to what it would have been if we had stayed in the EU. (That would imply a bigger hit to the European element than seen so far, but the effect takes time to build.)
Yet Sampson highlights one surprising twist: the visible Brexit effect is almost entirely concentrated on imports from the EU. These looked to be down by 20-25 per cent relative to imports from elsewhere. Total exports to Europe, by contrast, look almost unaffected on the headline numbers.
A certain type of Brexit enthusiast may seize on this as good news—a sign of Britain ditching its dependence on French claret and German BMWs and paying its own way. Sadly, other things are going on under the surface: new work by Sampson and colleagues concludes that the overall stability here “hides a steep decline in the number of export relationships, driven by the exit of small exporters”—the firms most deterred by the new fixed costs of trading.
Moreover, in a world of integrated supply chains, the headline figures could potentially be distorted by tweaks to logistics. Now selling to the EU and Britain requires different paperwork, could makers of Korean TVs and Bangladeshi t-shirts, who previously routed their goods to Britain via another EU country, simply be shipping straight to the UK instead? If so, that could help unravel the mysterious import/export gap—in a way that offers domestic industry no comfort.
Most fundamentally, insofar as there ever was a pure economic argument for Brexit—as opposed to an argument for political control of the economy—it was about breaking out of “fortress Europe” and welcoming in more cheap imports from elsewhere. But as European trade dives, the OBR is blunt: new trade deals with other parts of the world “will not have a material impact.” By contrast, the high priests of libertarian Brexit are resorting to ever-wilder assumptions. The marketopian economist Patrick Minford managed to calculate that the recent Australian trade deal could add a full 3 percentage points to GDP (37 times more than the government dared claim) by effectively assuming we’d feast on so much Aussie food that Britain’s farmers would simply give up, freeing up fields for a building boom. Hardly the plan that rural Brexit voters had in mind.
So much for goods: what’s ultimately more important to an economy like ours is services. Comparing the latest official data to the position in 2018 (the last “ordinary” year before either Covid or panics about a no-deal Brexit), a new study from think tank UK in a Changing Europe finds that total service exports to Europe have dropped by 14 percentage points more than those to the rest of the world. There are bigger hits to two especially important categories: professional services (with an excess hit to EU sales of 52 percentage points) and financial services (where the same gap is 38 points).
Hard Brexit surrendered the City’s “passporting” rights for its institutions to be treated as European by EU regulators. So how is it faring?
Amsterdam immediately overtook London as the prime site for share-trading in Europe, a development directly linked to a bar on EU investors doing Euro-denominated equity trades outside the single market. A drift in derivative dealing towards the US has likewise been observed. Beyond that there are few certainties, because the Brexit effect is clouded by other events.
But that inherent difficulty is compounded by what finance specialist Nicolas Véron calls a “stunning” lack of curiosity in the City. He blames border-straddling firms seeking to “keep under the political radar.” Banks may expand an office in one jurisdiction and shrink in another, but they prefer to downplay any connection to controversies like Brexit. We’re left with hearsay. Even so, in 2021—actually a good year for finance—Véron was struck by a sense of “good people leaving” London and activity seeping away.
The authorities, he says, are as coy as the institutions they regulate: on both sides of the Channel they have made it “their primary objective” to avoid a sudden bang. The original end date for clearing Euro-denominated derivatives in London has been quietly pushed back to allow Europe time to deepen its clearing capacity. A European Central Bank exercise is due, interrogating the location of the staff and capital that non-EU banks use to do their EU work, but its general conclusions could be less important than the way regulators choose to gradually apply them in cases against specific firms in the coming years.
Overall, the dynamics are only pushing one way. That’s true even if—a big if—the Europeans resist the mercantilist opportunity to bolster “their” firms against Britain’s, and adopt a technocratic approach to managing the unique risks posed by a neighbouring financial hub beyond their control.
Zoom out from trade and look at total business investment across the entire UK economy, and two things jump out: first, it suddenly stopped going up after the 2016 referendum; second, we have failed to see a vigorous bounce back from Covid. Post-lockdown and post-hard Brexit, business investment is 10 per cent down on 2019, and vastly down on where it would have been if pre-2016 expansion had continued.
Eye-catching individual investments, such as Nissan’s (quietly subsidised) commitment to Sunderland, are the exception, not the rule. Low investment directly feeds into lower growth. After an intermittently rapid ride out of the pandemic, the IMF forecasts UK growth for 2023 of half the advanced economy average.
Meanwhile, surveys are registering an extraordinary dive in consumers’ confidence regarding their personal financial outlook, historically a strong predictor of recession. The chief cause is global energy markets, but Brexit can’t be helping. It will escape all blame for worsening economic problems, however, until someone points the finger.
Even as the government is reduced to “crown stamp symbol on pint glasses” and “iconic blue passports” in its “benefits of Brexit” white paper, Keir Starmer says there is “no case for rejoining the EU,” or even the single market or customs union. If the British economy had a voice, it would surely whimper its dissent.
