Brexit hitting UK economy and damage set to worsen with new trade barriers, Budget watchdog warns
Brexit is dragging down the economy and its impact is set to get worse due to new trade barriers, the Government’s Budget watchdog is warning.
The UK’s Gross Domestic Product (GDP) is set to grow by a modest 0.8 per cent this year, before picking up to around two per cent annually over the next four years, according to the Office for Budget Responsibility.
But in its detailed analysis of Chancellor Jeremy Hunt’s Budget, it stressed: “The effects of subdued investment, the energy price shock and Brexit compound the ongoing weakness seen since the financial crisis.”
The OBR expects Britain’s recovery, having fallen into recession at the end of last year, to largely be driven by a pick-up in household consumption growth to around two per cent from 2025 to 2028.
Compared to last autumn, it now expects higher household disposable incomes, a sharper slowdown in inflation, and lower interest rates.
But it believes Britain’s net trade will “make a negligible contribution to growth” over coming years.
“We forecast that trade volumes will continue to be subdued in the next few years due to sluggish growth in the UK and global economies, and the evolving impact of Brexit.
“From 2024 to 2028, we expect export and import volumes to average growth of 0.3 per cent and 0.1 per cent a year, respectively.”
The OBR also emphasised that the full implementation of the Brexit Trade and Cooperation Agreement, signed on December 30, 2020, between the European Union and the United Kingdom will “further increase barriers to trade in goods with the EU” in coming months.
It added: “The application of the TCA remains ongoing, with the UK implementing physical inspections on imports from the EU from April 2024 and further declaration requirements from October 2024.
“We expect the total impact of Brexit to be realised several years after full implementation of these barriers.”
The Government, though, is refusing to acknowledge there is economic damage from Brexit.
The Prime Minister’s official spokesman said: “The Government is very clear of the benefits that the UK has already seen since leaving the European Union.”
He highlighted a new independent trade policy had led to the signing of trade deals, the “taking back control” of the UK’s borders, and revoking of more than 2,000 laws.
But the Budget watchdog stuck to its prediction over the scale of economic damage being inflicted on Britain by Brexit splintering it away from its biggest trading partner, the European bloc, and the Government has yet to strike a much-promised free trade deal with America, or one with India, and tens of thousands of asylum seekers and economic migrants have crossed the Channel by “small boats” in recent years.
On the economics, the OBR explained: “Since the June 2016 EU referendum, our forecasts have assumed that the volume of UK imports and exports will both be 15 per cent lower than if we had remained in the EU.
“We assume that the resulting reduction in the trade intensity of GDP will lead to a 4 per cent reduction in the potential productivity of the UK economy (relative to remaining in the EU), with the full effect felt after 15 years.”
Going into further detail, the OBR stressed that trade volumes in all advanced economies declined sharply at the height of the Covid pandemic in 2020.
“However, UK trade intensity (exports plus imports as a share of GDP) has not recovered in line with other G7 countries since then,” it stated.
“In the third quarter of 2023, UK trade intensity remained 1.7 per cent below its pre-pandemic level from 2019. By contrast, it had risen 1.7 per cent above pre-pandemic levels on average in the rest of the G7.”
The watchdog also emphasied that:
* Growth in UK goods trade (exports plus imports) has fallen well behind the rest of the G7.
At the end of 2023, UK goods trade was around 10 per cent below 2019 levels, while it was around five per cent higher on average for the rest of the G7 in the third quarter.
* Meanwhile, UK services trade growth has been the strongest in the G7. It reached around 12 per cent above 2019 levels at the end of 2023, versus around nine per cent above in the rest of the G7 in the third quarter.
Explaining these different trends, the OBR highlighted four possible factors; global trade in services, where the UK has a relative comparative advantage, has grown faster than global goods trades since 2008, post-Brexit trade barriers have created “more significant frictions” for goods than services, the UK is less dependent on the EU for services exports than goods exports, and digitalisation makes trade in some services easier and less dependent on physical proximity.
UK services trade has continued to grow strongly, including with the EU, despite the increase in trade barriers post-Brexit, the OBR added.
Around two thirds of this growth since 2019 was driven by the ‘other business services’ sector, which includes management consulting, research & development, and advertising, while exports of financial services and transport declined 5.9 per cent and two per cent per cent respectively.
