The United Kingdom’s economy has absorbed a substantial 6% hit from the effects of Brexit, according to a recent analysis by economists leveraging internal Bank of England data. This comprehensive study examined the decisions, views, and financial results of thousands of British companies since the referendum a decade ago, offering a granular perspective on the economic consequences.
The analysis, which utilized data typically employed by the Bank to inform interest rate decisions, sought to quantify lost growth by reconstructing a hypothetical trajectory for the UK economy had it remained within the European Union. It concluded that approximately half of this economic impact stemmed from the immediate surprise and subsequent uncertainty that characterized the post-referendum period. The remaining half is attributed to the rising trade barriers that emerged following the UK’s departure from the customs union and single market in 2021.
Methodology and Expert Corroboration
Co-authored by British professor Nick Bloom from Stanford University and economists at the Bank of England, the study represents a novel application of the Bank’s extensive corporate sector information. Professor Bloom highlighted that the UK had been experiencing rapid growth in the years preceding Brexit, suggesting it could have at least partially maintained pace with the United States’ economic performance without the significant disruption. He emphasized that the Bank of England’s company data provided crucial corroboration for these findings.
Bloom’s paper concludes with a clear statement on the long-term nature of the impact: “In the case of Brexit, there was a substantial economic impact on the United Kingdom, but it arose gradually over the subsequent decade.” This gradual manifestation underscores the complex and evolving nature of the economic adjustments post-Brexit.
Bank of England’s Candid Assessment
The findings align with increasingly candid assessments from the Bank of England’s top officials regarding the economic consequences of Brexit. Governor Andrew Bailey recently told journalists that, as a direct result of Brexit, “I think the level of activity and growth in the economy has been lower.” He elaborated on the mechanism, stating, “And the reason for that is that if you reduce the size of the markets that we trade with, so we reduce our export markets, then that does tend to have a negative impact on growth.” Bailey also noted adverse effects on productivity and the overall size of the market.
However, Governor Bailey offered a more tempered view on the financial services sector, acknowledging that while the impact was “not good,” it was “nowhere near as detrimental as many people predicted at the time.” This nuanced perspective highlights the varied effects across different sectors of the UK economy.
Broader Context and Criticisms
While the company-level data points to a 6% economic hit over 10 years, the study also incorporated five more traditional analysis methods. These wider studies collectively suggest an average economic impact of 8%. The latest version of this study has been published just ahead of the 10-year anniversary of the referendum, adding timely relevance to its findings.
Despite the robust methodology, some critics contend that the study may not fully account for external factors such as the outperformance of the US investment and tech industries or the European energy shock that occurred four years ago. Furthermore, some policy economists argue that accurately modeling the UK’s growth trajectory without Brexit is inherently challenging, and that such studies might overstate Brexit’s impact, particularly given the multitude of global crises experienced during the period.
Unique Data Application
This study marks the first instance where key Bank of England information about the British corporate sector has been utilized in this specific manner to isolate the impact of Brexit. The data, known as the Decision Maker Panel (DMP) data, is typically used to help inform the setting of interest rates. However, it was originally established by the Bank of England in 2016 specifically to provide insights into the economic impact of Brexit. The authors meticulously tracked years of company responses to gauge firms’ exposure to various aspects of Brexit, reported impacts, and any subsequent changes in their financial accounts.
It is important to note that while the study was co-authored by economists at the Bank of England with access to all the Bank’s data, the paper officially carries a disclaimer stating that “the views expressed do not necessarily represent those of the Bank of England.”
The publication of these findings comes as political efforts to redefine the UK’s relationship with the EU continue. Prime Minister Keir Starmer has announced plans to meet his EU counterparts at a summit in July, aiming to agree on deals concerning food and farm exports, as well as electricity and emissions trading. Further areas of cooperation and alignment are also anticipated to be discussed, indicating an ongoing process of adaptation and negotiation in the wake of Brexit’s economic shifts.
