Brexit has damaged Britain’s competitiveness, and will make us poorer in the decade ahead

Brexit has not had the expected effect of narrowly reducing exports to the EU, but has instead more broadly reduced how open and competitive Britain’s economy is, which will reduce productivity and wages in the decade ahead, according to new joint Resolution Foundation and LSE research published today (Wednesday).

The Big Brexit – the 26^th report for The Economy 2030 Inquiry, a collaboration with the LSE, funded by Nuffield Foundation – provides the most detailed assessment to date of the ongoing impact of the UK’s Trade and Cooperation Agreement (TCA) with the EU, and what the lasting effects of Brexit are likely to be on workers, firms and industries throughout the UK.

The report notes that the immediate impact of the referendum result has been clear, with a depreciation-driven inflation spike increasing the cost of living for households, and business investment falling.

Trade patterns however did not respond until the introduction of the TCA in January 2021, with the overlap with pandemic making it harder to assess its initial impact. The report shows that the UK hasn’t seen a large relative decline in its exports to the EU that many predicted, although UK imports from the EU have fallen more swiftly than those from the rest of the world.

But while the UK has avoided a large relative fall in EU exports, the report notes this is in part because the impact of Brexit appears to be a more general reduction in openness and competitiveness.

It finds that Britain has experienced a sharp decline in trade openness (total trade as a share of GDP) since 2019 – a fall of 8 percentage points. France, which has a similar trade profile to the UK, has experienced a far smaller 2 percentage-point fall over the same period.

This decline is not explained by changes in the pattern of global trade during the pandemic. The report notes that the UK also lost market share across three of its largest non-EU goods import markets in 2021: the US, Canada and Japan.

The full effect of the TCA will take years to be felt but this move towards a more closed economy, say the authors, will make the UK less competitive, which in turn will reduce productivity and real wages. The research estimates that labour productivity will be reduced by 1.3 per cent by the end of the decade by the changes in trading rules alone. This will contribute to weaker wage growth, with real pay set to be £470 per worker lower each year, on average, than it would otherwise have been.

This shift towards a more closed economy will have large effects on some sectors, with the output of our fishing industry expected to decline by 30 per cent, and some workers will face painful adjustments. But it will not fundamentally transform the structure of the economy overall – tradable professional services are expected to shrink as a share of the economy by just 0.3 percentage points, and manufacturing by just 0.1 percentage points.

Detailed modelling finds that one of the worst hit sectors of the UK economy will be the manufacture of electrical equipment, which is particularly reliant on cross-border supply chains. In contrast, the manufacture of food products is set to grow post-Brexit as it supplies the UK market.

These shifts will add to Britain’s productivity challenges, as the manufacturing sectors of the economy that are expected to shrink tend to be more productive than ones that are expected to grow – average productivity among shrinking manufacturing sectors is £47 per hour, compared to £37 per hour among growing sectors.

These contrasting fortunes of different sectors of the economy also mean that the impact of Brexit will be felt differently across the UK.

The report finds that the North East is expected to be hit hardest by Brexit – as its firms are particularly reliant on exports to the EU – while the East of England (which has a high share of food manufacturing) and Scotland are expected to outperform the rest of the country.

The report concludes that while the debate on the impact on Brexit has implied a one-off shock, adjustment will be gradual and create a lasting impact on Britain’s competitiveness and productivity over the coming decade.

Sophie Hale, Principal Economist at the Resolution Foundation, said:

“Brexit represents the biggest change to Britain’s economic relationship with the rest of the world in half a century. This has led many to predict that it would cause a particularly big fall in exports to the EU, and fundamentally reshape Britain’s economy towards more manufacturing.

“The first of these has not come to pass, and the second looks unlikely to do so. Instead, Brexit has had a more diffuse impact by reducing the UK’s competitiveness and openness to trade with a wider range of countries. This will ultimately reduce productivity, and workers’ real wages too.

“Some sectors – including fisheries – still face significant change to come in the years ahead. But the overall services-led nature of the UK economy will remain largely unaffected. Some manufacturing sectors, such as food manufacturing, will grow but others will shrink, including advanced manufacturing. The latter are generally higher productivity, and pay higher wages, than the former, showing how a less open economy feeds through into household living standards.”