Spotlight – What You Need to Know about Brexit, COVID-19, and the UK Economy

It is undeniable that Brexit had a major impact on trade in the UK. This resulted in a shortage of workers still causing significant disruption in industry today, with many market analysts predicting that worse may be yet to come. However, in terms of how the UK economy has fared since the country left the EU, economists disagree, with much of the fallout from Brexit blurred by the economic impact of COVID-19.

Is it really fair to blame the current economic downturn in the UK solely on the end of freedom of movement, when COVID-related lockdown restrictions also had a stifling effect on trade? Combined, Brexit and COVID-19 have created unprecedented challenges for UK businesses, disrupting supply chains, and creating fiscal uncertainty.

Brexit’s Impact on Financial Services

In the UK’s financial services sector, an industry that retains more than 1 million workers and added £132 billion to the UK’s GDP in 2019, the burning question was whether the UK would still be able to access the EU single market following Brexit. The answer that finally came from Brussels was a resounding no.

Prior to Brexit, UK financial firms could export products and services to the EU without obtaining any special authorization, license, or going through additional processes under a set of rules called “passporting.” Now that the UK is no longer an EU member, the country has also lost all of its passporting privileges, making it more difficult to access the EU single market.

To mitigate the issue, the UK government is striving to obtain an equivalence agreement with the EU. This would provide the UK financial services sector with continued access to EU markets, striking a deal that could potentially benefit both sides. Negotiations have been unsuccessful thus far, however.

Brexit’s Impact on Trade

In the run-up to the Brexit vote, the warnings were dire, with many economists insistent that a leave vote would cause an to go to next abrupt recession. A resultant slump in exports combined with a property price crash would only compound the problem, warned experts.

The EU remains an important trading channel for the UK. The consequences of erecting trade barriers and reducing trade volumes was touted as potentially disastrous in the run up to the 2016 Brexit referendum, with pundits explaining to voters that a successful leave campaign would almost certainly result in a decrease in national income. Economists also warned that the UK’s departure from the EU would discourage foreign investment in the country. Only now that Britain has left the single market will we find out for sure.

Monthly trade figures published in March 2021 revealed that total UK trade, meaning imports plus exports, with the EU fell by a third in January 2021 compared with the previous month. New figures reveal a partial bounce back, but trade with the 27 remaining EU countries remains far below 2020 levels.

The Impact of COVID-19

Nevertheless, the economic impact of COVID-19 has muddied the waters considerably, making it virtually impossible to say with any certainty whether this downturn was caused by Brexit, or the arrival of COVID-19 and the economic impact of repeated lockdowns in the UK.

UK food and drinks exports to the EU took a nosedive in the first half of 2021. Nevertheless, according to the Institute of Export & International Trade, the first three months of 2021 saw an increase in UK exports of financial services to the EU, despite previous warnings that London’s economic standing could potentially be decimated by a collapse in trade.

Data published by the Office for National Statistics provided some relief, reporting an increase of 1.4 percent in exports from the UK’s banks, finance firms, and bankers to the EU in the first quarter of 2021 compared with the same period in 2019. According to The Telegraph, the data undermines claims that Brexit would obliterate London’s ability to trade with the Continent.

COVID-19 Is Disguising the Impact of Brexit on the Economy

Economists on both sides of the argument are agreed on one thing: the UK’s new relationship with the EU has ensnared British exports in red tape, stifling trade, damaging the UK economy, and deepening labor shortages in the country. But with fallout from COVID-19 swamping economic data, with UK stockpiling hitting an all-time high in December 2020 followed by a subsequent slump in sales, the impact of Brexit and the impact of the pandemic are practically impossible to distinguish from one another.

In the leadup to the Brexit vote, London Stock Exchange Chief Executive Xavier Rolet warned the Treasury Select Committee that the UK’s divorce bill for Brexit could equate to the loss of 232,000 jobs in Britain’s financial service sector. While Rolet was by no means alone in painting a rather desolate picture, the estimate has proven far wide of the mark. According to The Economist, early predictions of floods of jobs disappearing in the UK’s finance industry proved inaccurate.

Many of London’s financial giants flexed their muscles in the leadup to Brexit, threatening to close down their UK operations in the event of a yes vote, pledging to move their interests overseas. Undoubtedly, there has been some loss to other EU markets. Nevertheless, the Armageddon scenario financiers warned of, with all the big banks jumping ship, has simply failed to materialize.

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