Dana Bodnar, a senior economist at Atradius, discusses with Global Finance the hard-learned lessons.
Global Finance: In the UK, what have been the impacts to date of Brexit and Covid-19? How do you separate the two?
Dana Bodnar: It’s impossible to directly discern the Covid-19 versus Brexit effect in the latest data— we need more time and data to do that with confidence. However, instead of comparing to 2020, which is primarily Covid-19 noise, to 2018 (pre-Brexit volatility) shows significant economic trends that have only accelerated in 2020. Also, comparing UK trade with the EU versus the rest of the world indicates notably worse performance in general. It suggests that the departure from the EU and the introduction of non-tariff barriers have exacerbated the adverse Covid-19 effects.
Brexit uncertainty spurred a massive sterling depreciation since the referendum. The exchange rate is now $1.38, down 6.8% from $1.48 on June 23, 2016, making sterling the worst-performing major global currency in that period.
There has been a sharp decline in trade since Brexit deadlines approached in 2018. UK trade with the EU has fallen nearly a fifth (-18.8%) since then, while trade with the world has contracted 14.2%. Uncertainty, supply chain adjustment, and non-tariff barriers drive this decline.
The growth in GDP has slowed significantly, averaging just 1.5% from 2016 to 2019 before crashing 9.8% in 2020 in line with pandemic and the stringent lockdown measures that the UK government implemented to contain Covid-19’s spread. Activity in sectors directly impacted by lockdowns such as the accommodation & food sector and arts & entertainment faced the sharpest contractions. Meanwhile, UK trade has contracted 14.3% since March 2020, largely due to border disruptions and shutdown of economic activity due to Covid-19.
GF: What about the impact on the rest of Europe?
Bodnar: Impact on the rest of Europe is more limited due to the economy’s relative size. Except for some countries like Ireland, most EU countries are less reliant on trade with the UK than vice versa, and the aggregate impact is much lower.
Higher trade friction between the UK and EU has lead to shifting supply chains. European industries dependent on trade with the UK are also affected by border disruptions and non-tariff barriers in the forms of increased paperwork and higher regulatory uncertainty. This is especially the case for the food and finance sectors.
GF: How have these changes reverberated (or not) across the globe? What lessons does Britain’s experience offer others?
Bodnar: There is limited evidence of Brexit’s impact globally, especially difficult to distinguish from Covid-19. It may offer some countries opportunities to secure better trade relationships, but the effect on trade of new trade agreements like the Australia deal is negligible so far.
So far, negative impacts on the UK economy are much more apparent than benefits and demonstrate severe political risk/uncertainty effects on an economy. This may offer a cautionary tale to other euro-skeptic countries, especially in contrast to Greece, whose trade with the EU has risen 16% since 2018 and whose economic growth exceeds the EU average.
GF: What lies ahead?
Bodnar: As more months’ data comes in, we’ll get a clearer picture to understand the impact of Brexit on the UK economy, beyond the one-off effects and Covid-19 impact.
The higher challenge to UK’s economic recovery lies ahead. Introduction of trade barriers with the EU limit prospects for external recovery. This also limits the attractiveness of the UK for investment, weighing on competitiveness. The domestic recovery will also be limited by the restrictions on the free movement of people. This exacerbates the effect of labor shortages which have been increasing both due to Covid-19 and Brexit.