On December 25th, The Guardian reported that six out of ten Brits thought Brexit had gone badly or worse than they expected. Three days later, the Daily Mail reported that two economic forecasts predict strong British economic growth in 2022. Goldman Sachs expects gross domestic product (GDP) to expand by an inflation-adjusted 4.7% while HSBC Bank puts the number at 4.8%.
Economic analysis firm Standard & Poor has similar expectations at 4.6%. Their forecast clearly puts the British economy ahead of the euro zone for 2022.
Who is right? Has Brexit hurt or helped Britain?
The question is merited not only against the background of negative public opinion and optimistic economic forecasts, but also with reference to mixed economic data. As we reported on December 30th, British exports to the European Union have fallen after Brexit, but they have also increased to other parts of the world.
If the strong expected economic growth materializes, it will be evidence that Brexit has been successful. However, success anticipated for next year does not mean the opinions reported by The Guardian from 2021 are without merit. Has Brexit actually hurt the British economy so far?
It is easy to find news stories that suggest as much. On October 27th, Richard Hughes, chairman of the Office of Budget Responsibility under the UK Treasury, predicted that Brexit would reduce the size of the British economy by about 4% “in the long run.” A year ago, CNN published a similarly gloomy forecast and in March, AP News reported that the British economy would be harmed by a plunge in post-Brexit international trade.
Britain is almost two years out of Brexit, and facts on the ground speak a different language than the negative news stories. According to national accounts data from the Organization of Economic Cooperation and Development, the OECD, the British economy has gone through the last two years pretty much the same way as other major European economies have.
That does not mean things haven’t been tough for the Brits. In 2020 and in the first quarter of 2021, their GDP contracted substantially. That period was followed by a significant recovery in the second and third quarters of 2021 (there is no data yet for the fourth quarter). This is a pattern consistent with other countries that responded to the pandemic with restrictions on economic activity.
On average since the start of 2020, the British economy has contracted by 1.5% per quarter, adjusted for inflation. This number is by no means unusual: over the same period of time, the German economy contracted by an average of 1.25% and the French by 1%.
In other words, there is no trace of any specific negative Brexit impact. In fact, in the third quarter of 2021 Britain outperformed almost every other European country: at 6.6% GDP growth it was behind only Greece, Ireland, and Estonia.
Just as there are still forecasts being published about how Brexit will hurt Britain, there were plenty of gloomy predictions before it became a reality. Less than two months before the 2016 Brexit referendum, the EU Commission published a forecast showing that the British economy would be hurt by the uncertainty related to a secession from the EU.
In 2018 the British Prime Minister presented a report to Parliament further highlighting the negative consequences of Brexit. While the report was judicious and cautioned against far-reaching interpretations of its conclusions, it nevertheless reinforced the narrative that Brexit would be economically harmful to Britain.
Since the referendum took place more than five years ago, in June 2016, we now have a fair amount of economic data to help us evaluate whether Brexit has harmed or helped the British economy. If the gloomy predictions were correct, the Brexit repercussions would show up in national-accounts data on GDP and business investments. Specifically, those effects would be statistically visible in the period immediately preceding Brexit.
That, however, is not the case. Based on OECD’s world-leading database, it is impossible to find any evidence of a pre-Brexit economic slump. In 2018 and 2019, after the referendum but before Brexit became a reality, the British economy grew at an average of 1.7% per year, adjusted for inflation. This is equal to the euro-zone average for the period. It is marginally behind France (1.9%) but ahead of Germany (1.1%).
Business as usual
A review of data on business investments comes up equally empty handed, without any clear evidence of depressing Brexit influence. In the time that has passed since Brexit took effect, businesses have spent a total of £660.5 billion on capital formation in Britain. Capital formation, or business investments, consists of construction of homes, offices, manufacturing plants, shops, department stores, warehouses, and other buildings. It also includes purchases of machinery, vehicles, and other equipment and products used in business operations.
These investments have taken place over a period of seven quarters, from the first quarter of 2020 through the third quarter of 2021 (again, there is no economic data yet for the fourth quarter of 2021). To see if this investment volume is in any way “normal” for the British economy, let us compare it to the amount of business investments during an equally long period of time before Brexit, namely from the second quarter of 2018 to the fourth quarter of 2019.
During the pre-Brexit period, businesses invested £690.1 billion in Britain. This means that business investments fell by 4.3% in the post-Brexit period. There was a noticeable decline in machinery and equipment purchases, but at the same time investments in cultivated biological resources went up 7.4%. This increase points to confidence among British farmers.
Investments in intellectual property rights are also on the rise. This category, which includes computer software, improved by 3.3%.
The small overall decline in business investments could be interpreted as a signal that Brexit has indeed hurt the British economy. This would be a valid point if comparable economies within the EU performed better. However, over the same two pre- and post-Brexit time periods, France lost 1.1% of its business investments, with losses and gains in the same categories as in Britain. Germany saw a marginal increase, but it was almost entirely due to a 10.5% rise in home construction.
Again, there is no clear evidence of any Brexit-related losses to the British economy. The negative numbers that are visible could very well be the result of COVID-related restrictions on economic activity. This is in fact a more likely explanation than Brexit, since the trends in the British economy tend to mimic those of the two other large European economies.
No loss of jobs to Brexit
This conclusion is reinforced by a review of labor-market data. If Brexit had negatively influenced the British economy, that influence would reveal itself in the rate of the population that holds a job. There would have been a particularly visible impact on the employment rate among young workers, aged 15-24. They are usually the first ones to be let go when businesses experience or expect an economic downturn.
The following numbers on employment from the OECD labor-market database are good news for Britain:
- Pre-Brexit, 54.8% of all Brits aged 15-24 were employed, compared to 48% in Germany and 30.2% in France;
- Post-Brexit, British youth employment stood at 52.2%, with Germany at 48.2% and France at 30.1%.
There is equally reassuring information in employment data for the workforce as a whole. Before Brexit, 75.9% of the total British workforce was employed, compared to 75.3% post-Brexit. Germany was a smidge ahead at, respectively, 76.4% and 76.1%. France remained far behind the other two with just over 66% of its workforce employed.
But what about foreign trade? Again, there is no shortage of disaster stories. In December 2018, the World Economic Forum (WEF) published a long article proclaiming that Brexit was already hurting British exports “by up to 13%.” The headline of the article falsely gave the impression that British exports were plummeting, when in reality it was “up to 13%” behind a simulated trend.
Once again, evidence is found in the OECD national accounts data, this time on exports and imports of goods and services. Over the seven quarters immediately preceding Brexit, Britain increased its exports of goods and services by an average of 5.5% per quarter in current prices. This number is entirely consistent with how British exports have varied with the business cycles over the past 20 years.
The OECD data also suggests that the WEF report misrepresents British exports in its simulation. This is no small error on their behalf, given that it sought to influence an almost-existential issue for Britain.
Here is how the WEF report erred. At the top of every business cycle, exports grow faster than trend, with growth rates often peaking above 10%. This peak is short and usually does not last longer than 3-5 quarters. However, the WEF simulation actually extrapolated this surge several years into the future.
In plain English, they take a temporarily higher level of exports and make it permanent. Then they compare the false trend extrapolation to actual data, which follows a predictable, and entirely expectable business-cycle pattern.
The WEF report presents its simulation in a way that almost suggests deliberate statistical manipulation. The explanation is likely more prosaic, namely that the authors of the WEF report simply did not apply due methodological stringency to it. That, however, is no excuse: their conclusion that Brexit was already hurting British exports carried the weight of the WEF and were simply not true.
Will Brexit inspire others?
A sober review of Britain’s foreign-trade data also shows that exports declined in the first seven quarters after Brexit. The drop, 6.8% per quarter on average, contrasts sharply against the pre-Brexit 5.5% average increase, but it is also consistent with trade patterns in other countries. Sweden, a highly export-dependent economy, saw exports grow at 9.7% in the seven pre-Brexit quarters but only at 0.6% per quarter post-Brexit. Finland experienced a swing from a 6.1% growth per quarter to a decline of 0.5%.
French exports went from a 3.9% average growth to a decline of 2.4%. Germany, one of the world’s largest exporters, experienced a slowdown from 2.4% to 0.9%.
Imports declined in most countries; in Britain, the decline resulted in an improved trade balance. Prior to Brexit, the trade deficit equaled 3.1% of imports; after Brexit, the balance fell to only one percent of imports. In other words, the Brits became better at paying for their imports.
It is important to note, though, that while trade is likely more affected by Brexit than the domestic economy, the improved trade balance still is not evidence of a positive Brexit impact. The effect is far too small for that to be the case. Furthermore, members of the European Union have experienced very different changes to their trade balances. If all EU member states trended in the opposite direction of Britain, it could be said that Brexit had indeed made a difference, but in lieu of such a trend the most reasonable conclusion is that Brexit has left no substantive footprint in British foreign trade.
This is also the general conclusion: the British economy has been largely unaffected by its exit from the European Union. That is not to say there will not be other repercussions; there is an ongoing debate about the future of the financial industry in London, with the implication that the British capital may lose its status as a global hub for the financial industry.
An exodus of financial business from London, unlikely as it is, would be symbolically significant, but it is important not to exaggerate the role of the industry in the British economy. In 2018 it contributed just over 6% to the country’s GDP. Furthermore, the prospect of strong GDP growth as predicted by Goldman Sachs, HSBC Bank, and Standard & Poor, also means a positive outlook for the financial industry.
So far, Brexit has been a British success story. If it continues to be, it is likely to inspire other countries to consider their own secession from the European Union.