Covid pandemic masks Brexit impact on UK economy

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More than five years after the EU referendum, Britain remains as divided as ever on the question of the UK’s membership of the bloc.

However, economists from both sides of the argument are in agreement on one thing — new rules and regulations ushered in by Britain’s new relationship with Brussels have caused damage to the UK’s economy, hitting trade and deepening labour shortages.

But the problem for pro and anti EU economists as they attempt to assess the effects of the first six months of the UK-EU Trade and Cooperation Agreement, is that the picture on trade and employment has been swamped by the economic impact of the Covid-19 pandemic.

Judging the long term effects beyond the coronavirus crisis is also uncertain — as is attempting to find the economic benefits of the UK’s break with Brussels.

Line chart of Industrial production (volume indices, Feb 2020 = 100) showing The impact of Covid has made the comparison of economic data difficult

John Springford, deputy director of the Centre for European Reform think-tank, said: “Generally, Covid has swamped the economic data making any comparisons difficult, so we cannot really disentangle the Brexit effect.”

The most important area where Brexit effects became visible quickly was in the trade in goods. After stockpiling in December, the additional customs and safety checks that were introduced from January 1 caused trade to fall sharply in the first month of the year before it recovered some of the lost ground.

But while there is no question that trade has suffered a Brexit hit, the full picture depends entirely on which statistics are used. Exports from the UK to the EU were 5 per cent lower in April than last December, according to the UK’s Office for National Statistics, but 24 per cent down when measured by Eurostat, the EU’s official statistical office, over the same period.

There are always differences in trade statistics, but economists said these were extreme.

The equivalent figures for imports showed the value of trade in goods from the EU to the UK was 19 per cent down over the same period, according to the ONS, while Eurostat recorded a 13 per cent drop.

These trade differences matter, according to Thomas Sampson at the London School of Economics. “If the UK [ONS] data is right, exports to the EU have done surprisingly well after the January dip,” he said.

Bar chart of Monthly trade in goods (% change, Dec 2020 to Apr 2021) showing Assessment of Brexit trade effects depends on the statistics used

Statistical agencies are busy trying to resolve the discrepancies. The ONS itself has now ruled out questions of seasonal adjustment and intra-company trade as reasons. Detailed figures suggest the differences are mostly in the trade in cars and other miscellaneous manufactured goods.

“We don’t have conclusive answers,” said Matt Hughes, a senior statistician at the ONS. “But increasingly we’re looking at the question of measurement of country of origin versus dispatch.” Under the post-Brexit trading arrangements, the UK measures exports to the country to which they are dispatched, while the EU seeks to define trade with the country where the goods have originated or their final destination.

It means that a car exported from the UK to Rotterdam, in the Netherlands, and then shipped to a country outside the EU would count as an export to the EU in the ONS statistics but not an import from the UK in Eurostat’s figures.

Even with these uncertainties over the trade figures Julian Jessop, an independent economist who describes himself as a “Brexit optimist”, said that so far the economic effects of the new rules has been negative. “We know that an increase in trade barriers will decrease the amount of trade and that’s clearly confirmed in the data, but the initial hit does seem to be fading,” Jessop said.

Such have been the uncertainties that no one is revising their professional judgment yet about the long term Brexit effects, which most economists and the UK government’s independent watchdog expect will lower the level of gross domestic product by about 4 per cent compared with remaining inside the bloc.

Professor Jonathan Portes, of King’s College London, said the long term economic forecasts were so far looking accurate. “Economists expected a reasonably significant trade effect, but not something catastrophic and that is what appears to have happened. It’s far too early to say what the long term effect will be, but there is no obvious reason to change the model based estimates on what we have seen so far,” he said.

After the one-off effects from the introduction of barriers, the question for the years ahead will be the degree to which supply chains crossing the English Channel rupture and the UK becomes a less attractive place to invest in.

The other key change so far has been the movement of workers, with new restrictions introduced limiting the rights of EU citizens to come to the UK and work, raising concerns about labour shortages.

Line chart of UK vacancies (000s) showing Job vacancies are returning to pre-pandemic levels

Professor Alan Manning, former chair of the Migration Advisory Committee, said the widespread reports of labour shortages resulted from “a mix of Covid and Brexit” and the fact that there were similar trends in other countries suggested it was not solely a Brexit effect. “Brexit has contributed and has not made any shortages better,” he said.

Manning added that some sectors needed to realise the days when they could expect labour to be on tap were over and in some sectors, such as social care, employers would need to pay more to ensure they had available staff.

If the evidence of Brexit’s negative impact is clear the benefits of splitting from the bloc are more elusive. The UK has rapidly rolled over many trade agreements with countries that already had deals with the EU and is close to signing with other nations such as Australia.

Few economists think these will deliver a significant boost to the UK economy with the government’s impact assessment of the Australia deal suggesting a total gain of only 0.02 per cent in the long term.

But Jessop is hopeful that other gains will show up now that “the uncertainty [surrounding Brexit] has been lifted”.

“The faster rollout of vaccines is indicative of the possibility that there may be future gains from regulatory independence,” he added.

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