100 Days of Brexit: Was It as Bad as ‘Project Fear’ Warned?
The warnings were stark. A vote to leave the European Union, the British government said, would trigger an immediate recession, a painful fall in house prices, and a steep drop in exports.
It’s almost 100 days since Britain completed its split from the EU -- almost five years after the referendum vote –- and a clearer picture of the consequences of the decision to leave is starting to emerge.
The divorce has already had a negative impact on the U.K. economy, the data show, even if it has been largely overshadowed by the coronavirus pandemic.
Many of the effects of Brexit will take more time to play out: with Britain outside the EU’s single market and customs union, trade with the bloc has been hampered -- but the full extent of the damage won’t be clear until businesses fully re-open after lockdown.
|100 Days of Brexit|
|This is the first in a five-part series about how leaving the EU changed the U.K.|
Some of the claims made by the Remain side, “Project Fear” as the British press dubbed it, have proved to be overblown, though. Here’s an early look at how Brexit is shaping up compared with the predictions.
The Short-Term Hit
In a report published before the 2016 referendum, the Treasury predicted that a vote to leave, followed by the immediate triggering of the Article 50 withdrawal process, would see national income decline by as much as 3.6% within two years, 520,000 more people unemployed, and house prices fall by 10%.
It didn’t turn out that way -- not least because the government didn’t invoke Article 50 until March 2017. By June 2018, gross domestic product had risen by more than 3%, unemployment had fallen by 280,000, and the average house price had gained more than 7%.
Then came Covid. GDP shrank almost 10% last year, the deepest slump since the Great Frost of 1709. The economy has only partially recovered from the huge losses incurred during the first lockdown last spring, leaving Britain further below pre-pandemic levels of output than any other Group of Seven nation.
Higher Cost of Living
In April 2016, the government sent a leaflet to all U.K. households, urging them to vote in favor of staying in the EU. It warned that leaving would increase the cost of living, because a falling pound would make imports more expensive. (About half of all U.K. imports come from the EU.)
That prediction turned out to be prescient. The pound fell by as much as 18% against the euro within two years of the referendum, and remains 12% below its level on the day of the Brexit vote.
Consumer-price inflation reached a 5 1/2-year high of 3.1% in November 2017, squeezing living standards. It remained above the Bank of England’s 2% target for almost all of the following two years. But inflation has since slumped because of the coronavirus pandemic.
The Treasury predicted that if the U.K. left the EU and managed to reach a trade deal with the bloc, the country’s economy would be between 4.6% and 7.8% smaller in 15 years’ time than if it would have been had it stayed in the EU.
Though Britain has only been formally out of the EU’s single market for less than 100 days, the Office for Budget Responsibility estimates that Brexit has already lowered GDP by 1.4% since the referendum. It now expects GDP will be 4% lower in the long-run than had Britain remained in the EU.
Dan Hanson of Bloomberg Economics puts the hit at 3%, or as much as 5% if the impact of the government’s restrictions on immigration is factored in.
The government said leaving the EU would make it more difficult for firms to export goods to the bloc, and that businesses would face higher costs.
This warning turned out to be correct. U.K. companies have had to grapple with additional red tape such as export health certificates to shift goods into the EU. In January, exports to the continent shrank by 41% from the previous month.
David Frost, who negotiated the post-Brexit trade deal with the EU and is now minister responsible for Britain’s relations with the bloc, has blamed stockpiling in December and the coronavirus lockdown for the reduction in trade. He says trade recovered to its normal level at the start of February. The data that will confirm or disprove that won’t be published until Tuesday.
Before the referendum, many in the City of London warned a vote to leave would trigger a wave of job losses. Accounting firm PricewaterhouseCoopers predicted that as many as 100,000 jobs in financial services would go.
In fact, far fewer jobs have relocated to the EU: 7,600 roles had moved as of March, according to EY, a consultancy. PwC didn’t respond to a request for comment.
Still, more jobs could go if Britain and the EU can’t reach a deal giving U.K. financial firms broad access to the single market, something they lost as a consequence of Brexit.
In the meantime, the City has lost business. Almost all trading of EU shares on U.K. exchanges -- more than 6 billion euros ($7 billion) in daily transactions -- shifted to the bloc in January. And banking giants such as JPMorgan Chase & Co. and Goldman Sachs Group Inc. have moved hundreds of billions of euros to their new or expanded hubs across the bloc.
What about the NHS?
The Leave campaign made less concrete and specific forecasts about the economic benefits of Brexit -- though one particular pledge stands out: a commitment to re-direct the 350 million pounds a week the U.K. sent to the EU to the National Health Service.
That figure was too large given the U.K.’s net weekly contribution to the EU only totaled 250 million pounds once the rebate Britain received from the bloc is included. A significant chunk of that payment also came back to the U.K. in the form of EU public sector spending.
In 2018, the U.K. announced plans to boost spending on the NHS by 394 million pounds a week in real terms from 2023, an increase the then Prime Minister Theresa May said would be partly funded by funds that would otherwise have gone to the EU.
But the U.K. will still have to send approximately 20 billion pounds to the EU over the next seven years as part of its divorce settlement. And Brexit’s negative impact on GDP and tax receipts is expected to outweigh any cost savings from no longer making contributions to the bloc, according to the Institute for Fiscal Studies.
The full cost of Britain’s decision to sever ties with its biggest and nearest commercial partner is likely to only become clear once the coronavirus restrictions ease and businesses return to normal. The debate is still far from settled.
©2021 Bloomberg L.P.