Beyond the Headlines: What Brexit Really Cost the UK Economy

Brexit: The Still-Emerging Economic Consequences for the United Kingdom at Four Years Post-Exit

It is four years since the UK officially left the EU. While the main political debates about Brexit have quieted, economic effects on trade, investment, and regional economies still seem blurry. The Trade and Cooperation Agreement (TCA ) by the EU and the UK in 2020 has defined the terms of trade between the two, but it is still too early to be given a full appraisal. These complexities are compounded by the repercussions of COVID-19 lingering in society and the general economic impact following the conflict in Ukraine. So, what's happening regarding the impact of Brexit on the UK economy?

Uncertainty and the Impact of COVID-19 and the War in Ukraine

It’s important to recognize that Brexit happened amid two other massive global shifts—COVID-19 and the war in Ukraine. The pandemic led to lockdowns, business closures, and significant disruptions to labor markets. Meanwhile, the war in Ukraine sent energy prices soaring, contributing to inflationary pressures. Separation of the economic effects of Brexit from these global crises is important to understand the full impact of Brexit on the UK economy. Though much research is still in progress, from what has been done so far, we have some clues about how Brexit is reshaping trade, investment, and labor markets.

The Initial Economic Predictions vs. Reality

When Brexit news hit the world, most economists forecasted it would drastically impact the UK economy. Reduced access to the EU's single market, reduced foreign investment, and even decreased wages, should the effects of Brexit alter wages downward, were all cited concerns. Still, immediately following the vote, there was not as much of an economic crash as expected. The pound declined, as predicted, but the predicted housing price crash was not observed. Similarly, whereas employment was forecast to increase, the UK labor market has been holding together reasonably well, and it has even witnessed a few percentage points decline in unemployment since the referendum.

The predictions about trade and migration have been closer to reality over a longer period. The distortion in UK-EU trade has been undeniable, while the economic impacts of being outside the single market and customs union are becoming apparent in the data from the past years.

Goods Trade: Notable Decline

The most conspicuous impact of Brexit on the UK economy has been on goods trade. However, UK imports from the EU have fallen by 25% since the introduction of TCA, as compared to imports from the rest of the world. This is largely because of new customs barriers, paperwork, and delays that make trade with the EU more expensive and time-consuming than hitherto. UK exports to the EU also fell, but this has been relatively smaller and more short-lived.

Surprisingly, smaller UK businesses have been affected considerably more, and most of them have reduced their exports to the EU due to increased costs and logistics. Large firms, although they face a different situation, are better able to deal with this new upsurge in trade barriers; however, the overall impact is still one of greatly reduced trade volumes.

Services Trade: The Hidden Impact

With services trade, the effects of Brexit are less quantifiable but equally critical. Services, particularly financial services, had long been a source of pride for the UK economy. Yet, post-Brexit, it has taken a battering, with considerable pressure points for the UK emerging, particularly as the TCA provided little assistance in the mutual recognition of regulatory standards or labor mobility, which are most important in services.

Regional and Sectoral Imbalances

The other overarching characteristic of the economics of Brexit is the regional and sectoral imbalances. The financial services sector in the UK has faced the bulk of the shocks, particularly those centered in London and the South East. Other sectors based in other regions were less likely to experience the impact because they had less to gain from EU membership or the impacts were relatively minimal.

The economic divide between London and other parts of the UK, already a very large gap before Brexit, will only widen further. Other regions in the UK that haven't benefited from the expansion coming from the EU are less negatively affected than London, where financial services are severely under stress due to Brexit.

The Road Ahead: Long-Term Effects Still to Unfold

Even though we are still in the early stages of comprehending the full extent of the economic effects of Brexit, one thing is clear: that the UK economy has only headed into stormy waters. Trade with the EU has become more challenging, adversely affecting goods trade. Changes have been noted in the services sector, particularly financial services, and regional disparities in economic performance.

Only time, new data, and further research will enable us to see and assess the impacts of Brexit on the UK economy in the long run. Undoubtedly, the whole picture may remain unclear for a long time, yet Brexit will continue to impact the UK's economic landscape in expected and surprising ways.