The Economic Impact of Brexit
Negative and self-inflicted but not devastating
One of the best slides I saw doing the rounds in the Treasury before I left was one listing the results of the studies to date on the economic impact of Brexit. Tucked away in a slide pack, resplendent in its disdain for formatting, was the elephant in the room of UK growth discussions; something no politician wanted to acknowledge, but something everyone knew was there. Brexit.
Some background
Before turning to what this slide set out however, it’s worth recapping on the timeline of events. For those not following the twists and turns of Brexit since the UK voted to leave the EU on 23 June 2016, a key point is that Brexit only actually happened at 11pm on 31 January 2020. This was the moment when the UK ceased being a member of the EU. The three and a half years between ‘the vote’ and ‘the Brexit’ can best be summarised as a trainwreck in which first no one had a plan, then no one could agree on a plan, with much talk of prosecco, prorogation, and protocols along the way.
Having formally left the EU, the UK-EU relationship was first governed by the terms of the Withdrawal Agreement, which in practice placed few restrictions on UK-EU trade. This expired on 1 January 2021 and was replaced by the Trade and Cooperation Agreement (TCA), intended as an all-singing, all-dancing trade deal; in practice something that will be argued over for decades. Until the implementation of the TCA, the UK’s trade arrangements with the EU did not materially change. Thousands of trucks a day continued to take the ferry between Dover in the UK and Calais in France, moving millions of goods, widgets, and food products. The economic impact of Brexit was in turn initially muted.
There was still an impact, as any chart of business investment in the UK makes clear. The tail off in investment post 2016, and its lumbering path until now, is testament to how uncertainty over the UK’s future relationship with the EU weighed on business decisions. The pound became a direct outlet for this uncertainty and remains ~13% weaker vs. the dollar and ~10% weaker vs. the euro since the day before the vote. Nevertheless, Brexit was hard to disentangle from other factors. Then covid hit, then the energy crisis hit, and Brexit, with its moderate and long-term drag on growth, became a sideshow to a prospective global economic meltdown.
Only post TCA has the impact on trade – and hence the longer-term economic impact of Brexit – begun to play out. Eight years post-referendum, three and a half years post TCA, and two years post the lifting of final covid restrictions in the UK, we can begin to take stock of the impact, and to look at how correct initial projections were.
Impact on trade, productivity, and growth
Back in 2016, there was almost unanimous consensus among economists that Brexit would be bad for UK growth, the question was to what extent and over what timeframe this would play out. To this end the UK Treasury was very publicly humiliated when its pre-referendum analysis of the immediate economic impacts of leaving the EU, including the headline conclusion that “a vote to leave would represent an immediate and profound shock”%, failed to materialise. In part this was because the relationship with the EU took longer to change than expected, and at least initially, there was positive sentiment around the UK agreeing a pragmatic trading arrangement. Furthermore – and critically for financial markets –the Bank of England swiftly cut interest rates and launched a new programme of asset purchases, nipping in the bud significant market volatility.
So, the Treasury retreated sheepishly back behind its walls in Whitehall and has been desperate to avoid publishing any economic forecasts since. But its assessment of the long-term economic impact of Brexit, which contained a central estimate of GDP being 6.2% lower under a negotiated bilateral agreement (where we ended up) doesn’t look too far out of line.
Macroeconomic modelling is not my forte, so I’ll leave others to dive into the detail on the studies listed above. What I would however note is that we now have an emerging body of empirical evidence to complement earlier forecasting, from a range of credible institutions. The picture emerging is that Brexit has led to UK GDP being ~4 to 5% lower than it would have been had we stayed in the EU. And that the initial drag on growth from uncertainty and productivity shocks, has given way to the drag of border checks, paperwork, rules, and regulations.
These (mostly non-tariff) trade barriers have been most acutely felt in goods and it’s here where the UK’s performance has lagged behind. UK services, on the other hand, sold globally and never depending as much on the EU single market (different rules and regulations abound in finance and law; language and cultural differences are huge) have roared ahead (J.Springford, the Resolution Foundation and the OBR have all detailed this so I won’t repeat). The UK continues to be the second largest exporter of services in the world, behind the US.
What does 5% of GDP mean anyway?
To put this in context, in the UK, the recession after the financial crisis saw a peak to trough fall in GDP of 6.4%; in the US it was 4.3%. In the UK recession of the early 1990s, GDP fell 2.4%. These comparisons aren’t like-for-like. A 4% fall in output is clearly more acutely felt over the short term than over the long-run, but after most recessions we also expect output to recover to previous levels. With Brexit, we’re talking about a shift to a a permanently lower level of output, and these comparisons figures give a sense of the scale of that output lost. It’s large, negative, and self-inflicted, but it’s also not devastating.
And that’s probably where we end up on Brexit. It’s a drag on UK output, but it’s not the be all and end all. Furthermore, all signs are that we’re past the low point of UK-EU relations. The Conservatives will soon be out of power, and the more hardline Brexiters among them already look discredited. For agriculture and manufacturing, the areas seemingly most impacted by trade barriers, there are pragmatic steps a new government could take, all of which could set the scene for a more stable period of UK growth. I plan to turn to the case for this in coming weeks.
References
HM Treasury Analysis: The Immediate Economic Impact of Leaving the EU, HM Treasury, May 2016
EU Exit Long-term Economic Analysis, UK Government, November 2018
UK Selected Issues: IMF Country Report No. 2018/317, IMF, November 2018
The Impact of Brexit on UK Firms, Bank of England, August 2019
The Cost of Brexit, J.Springford, Centre for European Reform, March 2021
Revisiting the Effect of Brexit, National Institute of Economic and Social Research, November 2023
Economic and Fiscal Outlook, Office for Budgetary Responsibility, March 2024
Brexit, Four Years On: Answers to Two Trade Paradoxes, J.Springford, Centre for European Reform, January 2024
The Structural and Cyclical Costs of Brexit, Goldman Sachs, February 2024
Looking forward to your next piece
Allow a little fun of my own, Victoria, if you don't mind.
I have often found myself debating Brexit, a difficult task on X because it's so polarising. I'm confident you won't call me a little Englander or white nationalist. :)
My Pro-Brexit rebuttal.
Brexit critics frequently cite studies suggesting that Brexit has reduced UK GDP by 4–5% relative to remaining in the EU. However, these estimates are constrained by methodological limitations:
Pre-referendum Treasury forecasts assumed an immediate collapse in trade, thus immediate recession. It never happened. Sources: OBR, IMF, BoE, and Every pro-EU trade body. WEF, even the UN.
The phased implementation of the Trade and Cooperation Agreement (TCA), combined with external shocks such as COVID-19 and the energy crisis, complicates any attempt to isolate Brexit’s precise impact. To your credit, you mentioned this.
Analyses such as those by the OBR "emphasise" short-term trade frictions but "downplay" potential benefits, including regulatory autonomy, services sector growth, and global trade diversification. The UK, the world’s second-largest exporter of services, has seen services trade surge post-Brexit, mitigating declines in goods trade. This FACT is always overlooked or ignored.
The full potential of Brexit has been constrained by political inertia and fighting across the isles and a failure to implement decisive reforms:
Accelerating regulatory divergence – The EU’s Circular Economy Package and digital regulations (e.g., GDPR) frequently misalign with UK priorities. Swift implementation of sector-specific reforms in fintech, artificial intelligence, and green energy could enhance competitiveness.
Supporting SMEs proactively – Following Brexit, 73% of UK businesses pivoted towards domestic suppliers. However, delays in investment in customs infrastructure and R&D tax incentives have dampened growth. The proposed £1.5 trillion household savings pool remains underutilised as a potential funding source for scaling SMEs.
Pursuing an aggressive global trade strategy – While the UK has secured agreements with 73 countries, progress on ratifying the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and securing a trade deal with the US has been sluggish. Even now, Starmer seeks to shackle the UK to the EU, knowing the US had doubled its GDP over the EU since 2008 when they used to par. That is a statistical fact also ignored. Prioritising a “Global Britain” approach over regulatory alignment with the EU could unlock high-growth emerging markets such as India and Brazil, where a weaker pound bolsters export competitiveness.
Tailored policies – Brexit has enabled policy flexibility, allowing the UK to abolish EU-mandated VAT on sanitary products, reform alcohol duties, and introduce Freeports with tax reliefs and streamlined customs processes. These measures deliver direct benefits to consumers and businesses while fostering innovation.
Reduced reliance on EU supply chains lessened disruption during the COVID-19 pandemic and the energy crisis. Domestic sourcing among UK firms rose to 74%, enhancing economic resilience.
Global leadership – UK services exports reached £870bn in 2023, fuelled by strong performance in finance, law, and technology—sectors that are less dependent on EU integration. The City of London remains a dominant force in foreign exchange and derivatives trading despite the loss of some EU-facing roles. However, LSE is losing listing to NY at a rapid rate. But fear Holland and France would force the decline of UK financial services have been proved wrong.
Levelling up – The £4.8 billion Levelling Up Fund and the UK Shared Prosperity Fund replace fragmented EU grants with locally tailored investment strategies (328).
Investment in innovation – The proposed digital portal for integrated business structures (1) could unlock £1.5 trillion in household savings for startups, mirroring post-war industrial growth strategies.
While Brexit has introduced friction in goods trade—UK-EU goods exports are projected to decline by 30% by 2025—this represents a transitional cost rather than a permanent contraction. Comparatively:
In 2023, the UK’s GDP growth matched that of France and outpaced both Germany and Japan.
The IMF forecasts that the UK will lead G7 growth between 2024 and 2028, challenging claims of long-term stagnation. However, given the debacle under Labour, this might need revising down.
For sure, Brexit has not been the meteoric success I had hoped for. This disappointing fact has been down to weak leadership, rather than Brexit limiting the UK.
Brexit’s economic impact cannot be reduced to a single GDP metric. While transitional costs are undeniable, the UK’s ability to pivot towards services, implement strategic deregulation, and cultivate global trade alliances offers a pathway to sustained, sovereign growth. The pro-EU argument’s emphasis on short-term trade losses neglects the broader geopolitical and economic recalibration that Brexit has initiated—a process still in its early stages.