Brits start thinking about Brexit again as economy slides into recession

The UK’s growth prospects are even lower than those of Germany, whose economy is particularly exposed to rising energy prices due to its dependence on Russian gas imports. The OECD said “continuing uncertainty” associated with rising capital costs would continue to weigh on business investment in the UK, which has fallen sharply since Brexit.

Britain’s Independent Office for Budget Responsibility (OBR) has offered a bleaker outlook, forecasting a contraction in GDP of 1.4% in 2023, even as the Bank of England and government are forced to tighten monetary policy and fiscal to contain inflation and prevent the economy from overheating. .

The OBR said in its economic and fiscal outlook last week that its trade forecast reflected the assumption that Brexit would cause the UK’s trade intensity (the integration of an economy into the global economy) to be lower by 15% in the long term than if the country had remained in the EU.

Fall in commercial intensity

In May, the OBR estimated that the UK’s new terms of trade with the EU, set out in the Trade and Cooperation Agreement (TCA) which came into force on 1 January 2021, would reduce productivity to long term of 4% compared to the previous trajectory had the United Kingdom remained in the EU.

The Bank of England’s Monetary Policy Committee released a similar projection, and former BOE policymaker Michael Saunders told CNBC on Monday that a key driver of the weakness in Britain’s economy is reduced trade intensity due to Brexit, leading to lower productivity growth.

Saunders argued that there is “abundant evidence” that increased trade intensity – or greater openness to export and import trade – increases productivity growth.

“The UK has increased trade barriers with Europe and trade deals with other countries just maintain the status quo of trade with third countries – there has been no significant net increase the intensity of trade with non-EU countries,” he said. .

“So the overall net effect has been a significant reduction in UK trade intensity, which you can see in the sharp decline in imports and exports as a percentage of GDP since 2019 compared to trends in other advanced economies and compared to the trends we’ve seen in previous years.”

UK trade as a share of GDP has fallen from around 63% in 2019 to around 55% in 2021, while domestic productivity growth is also sluggish. The Bank of England and the OBR believe that UK potential output has fallen squarely since the fourth quarter of 2019 and will experience anemic growth over the next few years.

New York-based rating agency Kroll Bond downgraded the UK even before former prime minister Liz Truss’ disastrous mini-budget in September sent bond markets into a tailspin.

Ken Egan, head of European sovereign credit at KBRA, told CNBC last week that Brexit marked a “turning point” for the UK, as it led to several structural weaknesses in the economy.

“Part of the reason for our downgrade was a longer-term view that Brexit has had and will continue to have a negative impact on the UK from a credit perspective, in terms of everything from trade to public finances through to the macroeconomic aspect of things.”

The KBRA, like the OBR, the Bank of England, the International Monetary Fund, the OECD and the majority of economists, believes that growth will be weaker in the medium term due to Brexit.

“Trade has already suffered, the currency has weakened but we haven’t seen the offsetting improvement in trade, investment has really been the weak point since Brexit, business investment has really deteriorated quite strongly,” Egan explained.

“If you compare inflation in current momentum to the rest of the world, basic services, basic goods inflation in the UK seems to be much higher than in the rest of Europe. It’s that idea that even if the energy crisis was over tomorrow, you would still have those stickier inflation pressures in the UK”

Change in public mood

Saunders said that while part of the deterioration since the fourth quarter of 2019 was due to the coronavirus pandemic, Brexit also had a role to play, as the rise in trade barriers with the EU for businesses from the start of 2021 hampered activity.

“If you don’t want to completely reverse Brexit, you can always opt for a softer Brexit than the one the UK has chosen to do,” he suggested.

“The UK went for just about the hardest Brexit and that was a choice, we could have left the EU but opted for a form of Brexit that would have put far fewer barriers to trade, the trade intensity would have suffered less, productivity would suffer less over time.”

The government of new Prime Minister Rishi Sunak is expected to enjoy friendlier relations with the EU than either of his predecessors, Boris Johnson and Liz Truss. However, the Tories and Labor have ruled out any return to EU-aligned institutions for fear of starving voters out of key pro-Brexit constituencies.

Still, a recent poll suggests the public mood may have started to change. A frequent YouGov poll earlier this month showed 56% of the population said Britain was ‘wrong’ to vote to leave the EU in 2016, compared to 32% who said it was the right one decision.

The 24-point deficit was the biggest in a series dating back to 2016, and almost a fifth of Leave voters now thought Brexit was the wrong move, which was also a record.