Brexit and Its Impact on Current and Future Growth of the British Economy

People around the world remain confused and surprised by Brexit (a term that is a portmanteau of “Britain” and “exit”).

Brexit refers to the decision of British citizens to leave the European Union (EU) in 2016 (although the actual exit did not occur until the beginning of 2021). In other words, citizens of the United Kingdom (UK) are still getting used to what it means to be separate from the EU, especially during the COVID-19 pandemic.

Luckily, the UK and the EU entered a provisional free-trade agreement at the end of 2020 that supports the free trade of goods without tariffs or quotas. However, some details about the trade of services remain blurry, which can be stressful considering these deals make up a vast majority of the British economy. At the same time, the agreement prevented a no-deal Brexit, which would have been very damaging to the UK.

In 2021 the provisional agreement was approved by the British Parliament early in January and then the European Parliament in April. The deal, known as the Trade and Cooperation Agreement (TCA), allows for the trade of goods without tariffs or quotas. This trade still must go through customs checks, which did not happen when the UK was part of the EU.

While this agreement is promising for the future of the British economy, the decision to leave the EU has still had a significant impact on the UK. For the most part, trade and customs have continued as previously, so not much has changed since 2016 for people living in the UK. At the same time, the UK GDP has slowed significantly to rates as low as 1.2 percent, down from 1.9 percent in 2016.

How the UK Economy Has Reacted to Brexit

In 2018 the British pound recovered much of the losses it previously experienced but then hit another rough patch as the likelihood of a no-deal Brexit increased. The recent TCA agreement will likely help the pound remain strong and could reduce some of the inflation seen in the UK from 2017 to 2019. While 10-year rates of inflation were highest in 2008 and 2012, the percentage has been creeping upward the last few years, so it will be interesting to see how the TCA affects these numbers. The other point to consider is that British companies will need to attract native-born workers with Brexit in place, which means paying higher wages and ultimately passing a steeper price along to the consumer.

In addition, international trade will likely fall because of Brexit even if the UK can negotiate several free-trade deals. The National Institute of Economic and Social Research predicted a drop in goods and services trade of 22 percent due to Brexit and claimed that new free trade agreements would not be able to pick up the slack.

Crating agreements with leading powers around the world would likely only provide a boost of about 5 percent, which will not totally offset the European losses. As far as the TCA goes, the policy around services trade remains murky even though it is a major part of the British economy. The next year will be very important in terms of how the British economy changes to deal with its new position outside of the EU.

The Arguments for and against Leaving the EU

Many people remain baffled by the UK’s decision to leave the EU, especially considering the economic position in which the nation now finds itself. Most people who voted to leave did so based on several factors, including the European debt crisis and the perceived drag on British economics. The UK has a long history of mistrusting the EU and its projects, which is evidenced by the fact that the nation never joined the monetary union and continued to use the pound instead of the euro. In addition, the UK chose to remain outside of the Schengen Area, which kept its borders closed to several other European nations. For a long time, the UK has separated itself from the EU. Brexit was a way to achieve an actual separation and make it legally viable.

Not all British citizens were in favor of Brexit, and the final vote was quite close. People who preferred to stay part of the EU were worried about pulling away from the decision-making process of this body considering that most British goods end up within Europe. In addition, many British citizens enjoyed the freedoms associated with being part of the EU, including the free movement across borders of goods, capital, people, and services. Pulling away from the EU would make free exchange much more complicated.

From both positions, the central argument was that Brexit would destabilize the British economy and potentially hurt its long-term economic viability. The effects of Brexit remain to be seen. While the economy has suffered a bit, there is still a lot of potential for growth.

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