It is still far too early to reach a definitive view on the basis of two months of trade data about how Brexit is likely to work out.
But there are some hints from the data and the diplomatic developments so far and we have tried to analyse them to see what they tell us.
It looks as though Brexit will be ‘harder’ than we had originally assumed after the Trade and Cooperation Deal was signed.
We are assuming that both exports to and imports from the EU will settle at a level that might be as much as 15% lower than would have been the case had Brexit not occurred. Some of the reduced imports will be replaced by imports from other sources.
The City’s activities will be initially hit by the movement of some activities elsewhere with an estimated loss of activity of about 10%. Our modelling suggests that only a third of this will move to other EU financial centres, the rest moving away from Europe or lost as a result of reduced economies of scale and scope. But this loss could be easily compensated for (our estimates are that the potential gain is twice the potential loss) by achieving the right post Brexit deals.
Some of our trade in services is linked to trade in goods and will therefore be affected. Tourism will emerge from the pandemic in a very different shape so it will be hard to observe the Brexit impact, though the abolition of the VAT retail export scheme will have a negative impact.
In principle, the effect on the UK’s critically important Flat White Economy should mainly be through the impact on its labour force. If the sector can still attract sufficient skills both from the EU and elsewhere it may survive Brexit relatively unaffected.
Because a significant proportion of the impact of the loss of EU exports will be compensated for by the production of import substitutes, we estimate that the initial negative effect on GDP will be a reduction of about 0.5% compared with what might have happened otherwise. This does not take account of the impact of faster rollout of vaccines and of new trade and deregulation opportunities that might emerge which could easily more than offset this.
We estimate that the impact of the earlier rollout of the vaccination programme than would have been possible had the UK been in the EU programme will give the UK economy a one-off boost of about 2% in 2021.
With Brexit harder than we originally expected, policy needs to be targeted at taking advantage of the deregulatory and trade policy opportunities that have become available. Taxes on anything that is internationally mobile should be reduced to levels as low as possible consistent with equity (it is important not to discriminate excessively in favour of the internationally mobile, who in general are already the most privileged in society). This relates to companies, residents and tourists especially. Climate change policies should be smart, to prevent negative competitive impacts.
A full report analysing the four main impacts of Brexit we have identified so far is now available and can be downloaded here.
The report covers the following:
• Impact on exports
• Impact on import substitutes
• Impact of early vaccine rollout
• Impact of regulatory and other changes
For more information please contact:
Douglas McWilliams, firstname.lastname@example.org 07710 083 652