Brits start thinking about Brexit again as economy slips into recession

Anti-Brexit protester Steve Bray (L) and a pro-Brexit protester argue as they demonstrate outside the Houses of Parliament in Westminster on January 8, 2019 in London, England.

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The UK’s growth prospects are even lower than those of Germany, whose economy is particularly exposed to higher energy prices due to its reliance on Russian gas imports. The OECD said “persistent uncertainty” coupled with higher capital costs will continue to weigh on UK business investment, which has fallen sharply since Brexit.

The UK’s independent Office for Budgetary Responsibility (OBR) has offered a bleaker outlook, projecting a 1.4% GDP contraction in 2023, even as the Bank of England and government are forced to tighten monetary policy and fiscal policy to contain inflation and prevent the economy from overheating. .

the OBR said in its economic and fiscal outlook last week that its trade forecast reflected the assumption that Brexit would result in the UK’s trade intensity (an economy’s integration with the world economy) being 15% lower over the long term than if the country had remained in the European Union.

Fall in trade intensity

In May, the OBR estimated that the UK’s new terms of trade with the EU, set out in the Trade and Cooperation Agreement (TCA) which entered into force on 1 January 2021, will be reduce long-term productivity by a relative 4% to the previous trajectory had the UK remained in the EU.

the bank of englandThe Monetary Policy Committee issued a similar projection, and former BOE policy former Michael Saunders told CNBC on Monday that a key driver of the weakness in the UK economy is reduced trade intensity due to Brexit, leading to lower productivity growth.

Saunders argued that there is “abundant evidence” that higher trade intensity, or more openness to trade in both exports and imports, increases productivity growth.

“The UK has increased trade barriers with Europe and the trade deals that have been made with other countries largely just maintain the status quo of trade with third countries: there has been no significant net increase in the intensity of trade with non-EU countries. belonging to the EU,” he said. .

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“So the overall net effect has been a significant reduction in UK trade intensity, which can be seen in the large drop in both imports and exports as a percentage of GDP since 2019 compared to trends in other economies. advanced and compared to the trends we saw in previous years.

UK trade as a percentage of GDP has fallen from around 63% in 2019 to around 55% in 2021, while domestic productivity growth is also slow. Both the Bank of England and the OBR estimate that UK potential output has fallen completely since the fourth quarter of 2019 and will endure anemic growth for years to come.

New York-based Kroll Bond Rating Agency downgraded the UK even earlier The disastrous mini-budget of former Prime Minister Liz Truss in September sent bond markets into a tailspin.

Ken Egan, KBRA’s director of European sovereign credit, told CNBC last week that Brexit marked a “tipping point” for the UK, as it led to several structural weaknesses in the economy.

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“Part of the reason for our downgrade was a longer-term view that Brexit has had and will continue to have a negative impact on the UK from a credit perspective, in terms of everything from trade to government finances and the macroeconomic”.

KBRA, like OBR, the Bank of England, the International Monetary Fund, the OECD and most economists, believes that growth will slow down in the medium term as a result of Brexit.

“Trade has already suffered, the currency has weakened, but we haven’t seen the compensatory improvement in trade, investment has really been the soft spot since Brexit, business investment has really deteriorated quite a bit,” Egan explained.

“If you compare inflation at the current dynamics with the rest of the world, basic services, basic goods inflation in the UK seems to be much higher than in the rest of Europe. It’s that idea that even if the energy crisis ended tomorrow, you would still have these stickier inflation pressures in the UK.”

public mood swing

Saunders said that while some of the deterioration since the fourth quarter of 2019 was due to the coronavirus pandemic, Brexit also had a role to play, as the rise in trade barriers with the EU for businesses since the start of 2021 blocked the activity.

“If you don’t want to reverse Brexit entirely, you can still go for a softer Brexit than the one the UK chose,” he suggested.

“The UK opted for the hardest of hard Brexits and that was a choice, we could have left the EU but opted for a form of Brexit that would have put far fewer barriers in the way of trade, the intensity of trade would have suffered less, productivity would suffer less over time.

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The government of new Prime Minister Rishi Sunak is expected to seek friendlier relations with the EU than any of his predecessors, Boris Johnson and Liz Truss. However, both the Conservatives and Labor have ruled out any return to EU-aligned institutions for fear of disenfranchising voters in key pro-Brexit constituencies.

However, recent polls suggest that the public mood may have begun to change. A frequent YouGov poll earlier this month showed that 56% of the population said Britain was “wrong” to vote to leave the EU in 2016, compared to 32% who said it was the right move.

The 24-point deficit was the biggest in the series dating back to 2016, and nearly a fifth of Leave voters now believe Brexit was the wrong decision, which was also a record.

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