UK (Washington Insider Magazine)—The aftermath of Brexit has taken a toll on the U.K. economy, resulting in higher inflation and significantly weaker growth, as revealed in a recent study conducted by Goldman Sachs.
Economic Consequences
Goldman Sachs’ research indicates that the U.K. economy is now 5% worse off than it would have been if it had never departed from the European Union since the Brexit referendum in June 2016. This downturn is attributed to a decline in trade and investment.
Stagnation in GDP and Per Capita Income
The study highlights that the U.K.’s GDP per capita has stagnated since COVID-19, increasing by only 4% since the 2016 referendum. In comparison, the eurozone witnessed an 8% increase, and the U.S. experienced a substantial 15% rise during the same period.
Inflation Disparity
Notably, the U.K. has faced notably higher inflation compared to rival advanced economies. Consumer prices in the country have surged by 31% since 2016, while the U.S. and the eurozone saw rises of 27% and 24%, respectively.
Trade Volume Decline
Goldman Sachs attributes the underperformance to the decline in trade volumes, with U.K. trade volumes approximately 15% lower than in comparable countries. Higher trade barriers with the E.U. and a resulting shift in supply chains have contributed to this decline.
Export Challenges
Post-Brexit, the U.K.’s exports of goods to the E.U. and the rest of the world have witnessed a sharp decline. Despite services exports remaining relatively stable, the overall export scenario has been challenging.
Investment Slowdown
Investment in the U.K. has stalled post-Brexit due to uncertainties following the referendum and a pullback by adversely affected companies. The study reveals that overall investment is 5% lower than it would have been if the U.K. had stayed in the E.U.
Labor Market Impact
Brexit has impacted the U.K.’s labor market, with a decrease in E.U. migration affecting labor market elasticity. The shift from E.U. migrants moving for work to a higher proportion of student migrants has altered the dynamics of the country’s labor force.
Migration Trends
The study highlights a reversal in migration flows between the U.K. and the E.U. since Brexit. Net migration from Europe has dropped from its peak of over 300,000 a year in 2016 to net negative levels today.
The limited migration has tightened the labor market in the U.K., exacerbating inflation in the national economy, according to Goldman economists.
However, the U.K.’s post-Brexit efforts to enhance the influx of high-skilled workers and curtail low-paid workers’ inflow are expected to contribute to the country’s long-term productivity improvement, they noted.
Despite ongoing challenges, there could be a rise in investment, aligning with recent quarters’ trends, as Brexit-related uncertainties gradually diminish. Even as reduced trade volumes continue to impact overall investment, the resolution of Brexit uncertainties may play a role.
While new trade agreements with non-E.U. countries might alleviate some long-term Brexit costs, the report suggests that the benefits are unlikely to outweigh the decline in trade with the European bloc.
