Friday, March 29, 2024 | Ramadan 18, 1445 H
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EDITOR IN CHIEF- ABDULLAH BIN SALIM AL SHUEILI

The cost to Britain for taking back control from EU

Andy-Jalil
Andy-Jalil
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One doesn’t know what would have happened to the UK economy if the 2016 referendum vote had been in favour of the Remain (in EU) side. But there are ways to estimate what would have happened, in order to compare it to reality to try to see the Brexit effect.


Short-run economic forecasting may not give a perfect result but we know many things now that pre-referendum forecasters did not, such as how global economic trends have developed since June 2016. Researchers estimate what would have happened to the UK by studying what has happened to other similar economies that did not vote to leave the EU.


Academics from Bonn, Oxford and Tubingen have used this approach to analyse how the Leave vote has affected UK output, as measured by GDP. It was done by constructing a control group of countries whose average GDP growth exactly matched the UK’s prior to the referendum, working from the starting point that, but for the Leave vote, growth in the UK and the control group would have continued to align after June 2016.


When actual UK growth since the referendum was compared to the control group, it was found that, by the middle of 2018, UK GDP was approximately two percentage points lower than it would have been without Brexit. The estimates imply that Brexit has cost the UK around £350m per week in lost output since the referendum — which might sound like a familiar number floated during the Leave campaign. Like any economic estimate, this number is subject to uncertainty and should be viewed as an informed guess, albeit one based on the available data and research methods.


Uncertainty makes businesses less willing to invest in risky new projects, while reduced openness makes the UK a less attractive destination for foreign investment and decreases the incentive for companies to invest in expanding the UK-EU trade. By estimating what would have happened if not for Brexit, researchers are starting to trace out the channels through which the Brexit vote has affected the UK economy.


The initial impact came through the exchange rate. After the votes were counted, the value of sterling quickly declined and it has settled around 10 per cent below its pre-referendum value. A fall in the pound increases the cost of UK imports, and in the year after the vote consumer prices rose rapidly. Analysis from 2017 by researchers at the Centre for Economic Performance estimated that the Brexit vote increased consumer price inflation by 1.7 percentage points in the year following the referendum.


Rising prices put pressure on household budgets and, by June 2017, the Leave vote was costing the average UK household £404 per year. Consistent with this finding, reduced consumer demand contributed to lower output growth from late 2016 onwards. By contrast, business investment initially showed no evidence of a Brexit effect. However, this changed in 2018 when business investment declined for four consecutive quarters and recorded its lowest annual growth rate since the financial crisis a decade earlier.


One bright spot for the UK economy has come from low unemployment. The labour market has continued to create jobs, and unemployment is at its lowest level for over 40 years. Dr Thomas Sampson, research leader and professor in the Centre for Economic Performance at the London School of Economics points out that combination of increasing employment and slow output growth implies that productivity growth has been disappointing. And without productivity growth, living standards will not rise.


Trade and foreign investment flows have now started to respond to the referendum. The decline in sterling makes UK export cheaper, but so far, there is little evidence that this has boosted exports. Analysis by the UK Trade Policy Observatory back in October found that the Brexit vote led to a decline in new foreign direct investment in the UK.


More recently, work published in February, by the Centre for Economic Performance showed that the Leave vote has led to a 12 per cent increase in new investment projects by British firms in the EU, but has not affected UK investment outside of the EU. These studies indicate that Brexit, in the short term, may be making the UK a less attractive place to do business. However, the long-run effects of Brexit will take into account the nature of future UK-EU relations.


(The author is our foreign correspondent based in the UK. He can be reached at andyjalil@aol.com)


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