Last week I wrote about the joy of the Brexit reset with the EU – that it was good for the soul to know that adults are in charge, bringing with them sensible policies will result in better trade, slightly more growth and a smidgen of hope that we are heading in the right direction. Now, like some economic ice bucket challenge, a deluge of reality has brought me back to reality and reminded me what a complete mess Brexit has made of our lives.
That ice-filled bucket comes in the form of a report by Anton Spisak for the Centre for European Reform (CER) called rather chillingly “A perfect storm”. Frankly the “reset” was nice but as Spisak explains in gory, relentless, detail, without much, much more of the same the UK is fucked.
I am sure the CER wouldn’t quite put it that way, but the facts are obvious for anyone with the ability to read. This report confirms the analysis produced by the Office for Budget Responsibility after the referendum – lower trade equals lower productivity equals lower wealth.
As expected, the UK’s trade performance post-Brexit has been a disaster, a catastrophe that is hitting growth, productivity and the nation’s wealth. Without a radical and rapid improvement, we will continue on a long, drawn-out period of relative economic decline, as our neighbours and rivals eat our lunch.
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As this report makes clear, “the UK is currently experiencing the most severe trade stagnation in a generation – and one that has undermined post-pandemic recovery and continues to weigh heavily on the country’s growth prospects.”
To see why that is the case you need to look at the UK’s trade performance over the last 50 years. Between 1980 and the financial crisis of 2008 the UK’s trade volume increased at 5% a year; after the credit crunch we managed over 2% a year.
To be fair, this was the same disappointing performance suffered by many other countries. But if the UK’s trade performance was mirroring global trends, that ended in 2020 and with Brexit. Since then, UK trade volumes have “suffered a particularly severe setback and, in contrast to many other countries, have not yet fully recovered.”
What could possibly have happened in 2020 to shatter the UK’s trade performance?
Covid hid the truth for a while but now the trend is obvious for all to see. “At the end of 2024, trade intensity remained 3.5 per cent below pre-pandemic levels, even as it rose by 1 per cent across the G7 and 3 per cent across the EU-27”. What little growth there has been has been driven by inflation, not increased volume of trade: “In real terms, UK trade volumes have grown just 1 per cent on their 2019 levels, compared to an 8 per cent growth in both the G7 and EU-27”.
Brexit has destroyed the UK’s trade performance, not just with the EU but with the rest of the world too.
By the beginning of this year, UK goods exports were 20 per cent below their 2019 levels. If they had kept pace with other countries’ trend rate, they would be 30% higher than they are now. It is a puzzle why trade to countries outside the EU have also fallen, but the answer may well be that “significant new frictions in trade with the EU are affecting supply chains across the board. As intermediate inputs sourced from European markets became costlier, the relative price of UK exports rose, and competitiveness declined across the board.”
It was, it seems, that being part of the EU kept us productive and competitive. Who knew?
Brexit has made all our exports less attractive and our industry less competitive. The UK is losing its share of global exports at a faster rate than Germany, which has been blighted by numerous serious structural problems. Uit seems Brexit was an even bigger blow than we thought.
The report says: “Compared to the G7 average, UK real GDP is nearly 5 percentage points lower than pre-pandemic, with exports lagging 11 percentage points behind. Against the EU-27 average, the overall GDP gap was narrower – around 2 percentage points………The UK stands out as a real outlier when it comes to post-pandemic trade.”
Remember, Brexit was supposed to make us richer not poorer, but it has cost us a fortune and it is costing us more every year. Because worse trade hits both the productivity of the UK and its economic growth rate.
Improvements in productivity are often driven by more intense, international competition, which forces companies to invest and innovate. Less trade means less competition and therefore less reason to innovate, invest and improve productivity. The great leap forward in British productivity over the last 50 years followed on from membership of the EU and its Single Market, but we left both and with them went the productivity improvements.
As for growth, the report says: “Exports have historically contributed positively to UK real GDP growth. Since 2020, however, exports have become a drag on UK GDP growth, on average subtracting nearly 0.5% per annum”.
Not all of this down to Brexit, but as Spisak writes: “This challenge… has been uniquely exacerbated by Brexit, which has increased the relative costs of exporting overseas for British manufacturers. The result is a subdued export performance on a scale that is unprecedented in recent history.”
That “unprecedented” hit to our export performance comes at the worst possible time, with rising protectionism, and instability. Trump has just put 10% tariffs on our exports to the USA, and that is considered a victory for the UK. What would defeat have looked like?
So, what can we do? First off, the Labour government has to have a laser-like concentration on trade if it really wants to get growth going. This is not a statistical blip, this is a structural failure.
We have therefore to end our long-running decline in competitiveness and realise that without improved trade, growth will not improve. And we must concede that the UK-EU “reset” was nowhere near enough to kick-start growth. According to Spisak, it is “unlikely to make a noticeable difference to the current growth trajectory.”
I am sorry the “reset” was nice, comforting and a step in the right direction but it was also nothing like enough. We have entered a sustained period of economic decline without the competition and openness necessary to force British industry to become efficient. Brexit has made us all poorer, we have lost touch with our competitors, they are racing ahead of us, and we are falling further and further behind.
Why do you think the government is borrowing so much, why wage growth is so weak, why tax revenues are not enough to maintain the state?
Sorry to rain on the parade, but these are the facts, and unless we face them, we are doomed to live through decades of further relative economic decline. Yet there are no signs we are ready to face one particular fact: that the obvious answer is to rejoin the Single Market ASAP.
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