Dumitru Maria-Georgiana

REI , Seria A, Grupa 947

What are the economic effects of

Brexit so far?
The Brexit vote two years ago has damaged the UK economy, as a weaker pound has
squeezed household incomes and uncertainty has hit investment. On that, economists
from all sides agree — despite having their differences over the extent of the damage
and whether the harm will intensify. On the two-year anniversary of the EU
referendum, forecasters’ estimates of how much Brexit has dragged down the
economy range from around 1 per cent of gross domestic product, or £20bn a year, to
2 per cent, or £40bn a year. An FT average of several models suggests that by the end
of the first quarter of this year, the economy was 1.2 per cent smaller than it would
have been without the Brexit vote. That represents a £24bn hit to the economy,
amounting to a “Brexit cost” of £450m a week or £870 a household per year. The
figure is increasing; when the FT last carried out a similar exercise, in December, the
average cost was £350m a week.

Even the most vociferous supporter of Brexit, Professor Patrick Minford of Cardiff
University, says his pre-referendum forecasts were too optimistic. “The accumulated
error between the second quarter of 2016 and fourth quarter of 2017 was a 1.2 per
cent overestimate for us,” he wrote recently. But Prof Minford also pointed out that
the hit to growth has been significantly smaller than the Treasury predicted in its pre-
referendum short-term forecasts. The Treasury had wrongly assumed the government
would immediately begin the two-year Article 50 divorce process from the EU —
which Theresa May eventually triggered in March 2017, rather than in June 2016 —
and that the authorities would provide neither fiscal nor monetary stimulus.
It put forward two scenarios that did not come to pass: a “shock” in which the
economy failed to grow in the immediate aftermath of the vote, and a “severe shock”
in which the economy contracted.

While the Treasury’s forecasts were clearly incorrect, quantifying any Brexit hit to the
UK economy is a perilous task, since an exact number is impossible to produce. Such
estimates rely on hypotheticals, since they compare the economy’s recent record of
growth with an estimate of how it would have performed if the British public had
voted to remain in the EU. Even the historical part of the equation is far from
straightforward, because recent economic data are regularly revised. Robert Chote,
chair of the Office for Budget Responsibility, warned in March “not to place too
much weight on early estimates of short-term movements in GDP as they are both
hard to measure and destined for revision”.

Nevertheless, economists are paid to make estimates. Sam Hill at RBC Capital
Markets estimated that, due to factors such as weaker household consumption and
business investment, Brexit had cut roughly 1 percentage point off national income by
the end of 2017. But he added that the Bank of England’s decision to cut interest rates
spared the country a pure Brexit effect of “approximately 1.5 percentage points”. BoE
governor Mark Carney has estimated a bigger Brexit effect, based on the disparity
between the bank’s pre-referendum forecasts — which assumed the UK would remain
in the EU — and subsequent reality. “If you look at where the economy is today
relative to that forecast, it is more than 1 per cent below where it was, despite very
large stimulus provided by the Bank of England, a fiscal easing by the government,
and global and European economies that are much, much stronger than they were
previously,” Mr Carney told MPs on the Treasury select committee in May “If you
adjust for those factors, and one should not be too precise about it, the economy is
about 1.5 per cent, 1.75 per cent, up to potentially 2 per cent lower than it would have
been,” Mr Carney added, saying it was reasonable to ascribe some of the shortfall to
Brexit. The FT’s analysis produces an average from a range of models. It takes the 2.8
per cent growth racked up since the referendum as a fact and compares it with various
alternative outcomes, based on simple assumptions. The smallest hit, of 0.7 per cent,
uses the historical growth rate between 2010 and the 23 June 2016 referendum as its
point of reference, while one of the largest, a 2 per cent hit, is based on a comparison
with the group of seven’s average growth rate since the vote. In that time, the UK has
slumped from the top to the bottom of the G7 league table.

Another approach is based on comparisons with countries with similar economic

growth to the UK ahead of the referendum. One such model, which gives Hungary a
23 per cent weight in the calculations, is used by John Springford, deputy director of
the Centre for European Reform, and suggests that output is now 2.1 per cent lower
than it would have been. All these individual calculations are controversial, but pro-
Brexit economists agree there is no perfect way of producing the estimates. Julian
Jessop, chief economist at the Institute of Economic Affairs, a free market think-tank,
assesses the Brexit hit to be 1 per cent, but thinks the negative impact on growth is
likely to be transitory. “Part of this hit is temporary and reversible, especially on the
investment side, rather than permanent, and also not necessarily a sign of worse to
come when we do actually leave,” he said. With just nine months to go before the UK
leaves the EU and no agreement with the EU near, other economists argue it would
rash to predict an end to the pain. “During 2018 the Brexit effect is set to continue to
accrue and could reach a cumulative two percentage points of GDP by year-end,” said
Mr Hill. “Although real income growth should return, it is still expected to result in
sub-par consumption growth. Headwinds to business investment could persist, whilst
the offset from net trade remains underwhelming.”