The U.K. economy is now 5% worse off than it would have been had it never left the European Union due to a slump in trade and investment since the Brexit referendum in June 2016, according to a new study by Goldman Sachs.
This slowdown has seen the U.K.’s GDP per capita stagnate since COVID-19, having increased just 4% since the 2016 referendum, compared to an 8% increase in the eurozone and a 15% increase in the U.S., said a team at Goldman led by chief European economist Sven Jari Stehn.
At the same time, the U.K. has experienced much higher inflation than in rival advanced economies, with the country’s consumer prices up by 31% since 2016, versus rises of 27% in the U.S. and 24% in the eurozone.
Goldman Sachs’ study compared the U.K.’s post-Brexit economy to a hypothetical model of one that never left the E.U., with that underperformance blamed on the trade drop, lowered investment and labor market impacts of the decision to leave the E.U.
U.K. trade volumes –- total imports and exports –- are roughly 15% lower than in comparable countries, due to higher trade barriers with the E.U. and the resulting shift in supply chains.
Britain’s exports of goods to both the E.U. and the rest of the world have fallen sharply since Brexit, even as its services exports, which account for 40% of the country’s total exports, have remained roughly on course, the report said.
Investment in the U.K. has also stalled since Brexit, as a result of uncertainty in the years immediately following the referendum alongside a pullback by hard hit companies. Overall investment is 5% lower than if Britain had never left the E.U.
The situation has been worsened by a drop in E.U. migration that has reduced elasticity in the U.K.’s labor market, despite an uptick in overall migration driven by people moving from countries outside the E.U., said Stehn and the team.
Prior to Brexit, most migration into the U.K. was from E.U. migrants moving for work. Now, a much bigger proportion of people entering the U.K. are students, who have much less of an impact in boosting the country’s labor force.
Flows between the U.K. and E.U. have also reversed since Brexit, in a shift that has seen net migration from Europe drop from its peak of more than 300,000 a year in 2016 to net negative levels today.
This lack of migration has led to a tightening of the U.K.’s labor market which has exacerbated inflation in the country’s economy, said the Goldman economists.
The U.K.’s post-Brexit push to increase flows of high-skilled workers and reduce flows of low-paid workers should, however, help to boost the country’s productivity long-term, they added.
The U.K. could also see an uptick in investment, consistent with that seen in recent quarters, as uncertainty around Brexit increasingly starts to resolve itself, even if lower trade volumes continue to drag on investment overall.
New trade deals with countries outside the E.U. could help mitigate some of the long-term costs of Brexit, the reports adds. However, any benefits are unlikely to outweigh the reduction in trade to the European bloc.