Impact of Brexit on UK Economy

Remember in October 2021 when a lot of people in the UK waited in long queues for hours to fill up their car tanks in the fear of an inadequate supply of fuel? Why did this happen: was there an inadequate supply because of limited availability or was it an effect of Brexit? Has Covid-19 been harsher on the UK economy due to Brexit? We will try to answer these and other questions regarding how Brexit has impacted the UK economy in what follows. Read along to learn more. 

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    Brexit Overview

    Brexit means the 'exit' of Britain from the European Union (EU). This process was finalised on the 23 June 2016 referendum. 51.8% of the country’s population voted to leave the EU. The UK's exit from the EU took place at the end of January 2020.

    The Impact of Brexit on the UK’s Economy

    The impact of Brexit on the UK economy was highly visible in the employment rates, trade, investments, exports, imports, and even on the automobile industry even before it happened.

    Positive impacts of Brexit on the UK’s Economy

    Some believe that one of the positive consequences of Brexit is that the UK can now trade more with other non-EU countries.

    With the decreasing value of the pound, it became cheaper to import goods and services from the international markets, which may make it a more lucrative market to buy goods from. The decreasing value of the pound also means that the current account balance improves as well as the net foreign debt position.

    Thanks to Brexit, the trade relationship with other countries like China, Canada, and India improved which in turn helped increase economic growth.

    Negative Impacts of Brexit on the UK’s Economy

    Even before the final exit of the UK from the EU, the country faced a decline of about 1.5% of the economy. The reason for that was the reduction in business investments, and transfers of businesses to the EU due to the expected higher trade barriers.

    The UK also faced a decline in the number of workers in the economy, as many of them came from EU countries and now couldn’t or wouldn’t stay in the country.

    Brexit also negatively impacted the UK's service trade balance and its goods trade balance as some goods which were freely traded before Brexit now require strict checks and approvals.

    Foreign direct investments were also negatively impacted. Investors had to think of new ways of getting into the EU as the UK is no longer a gateway point to EU single market.

    The Impact of Brexit on the UK’s Financial Market

    Since Brexit, the UK financial market has been very volatile and has not returned to its levels before it. The FTSE 100 share index has been very volatile and will remain unstable in the foreseeable future.

    The FTSE 100 share index is a share index of the 100 companies listed on the London stock exchange.

    These are some other impacts of Brexit on the UK financial market:

    • 10% of UK bank assets have moved or will be moving to the EU.

    • About 440 banking and financial institutions have left the UK.

    • Foreign investment fell significantly in the UK financial service projects.

    • London was replaced by Amsterdam for European share trading and London's derivative share trading lost ¾ of its euro volume to Amsterdam and New York.1

    The Impact of Brexit on the UK's Exports and Imports

    UK exports showed a drastic fall of about 45% in January 2021, and they went further down by 15% by the end of August. The UK's goods imports from the EU declined by almost 30% by January 2020.1

    Even though the UK has recovered in some sectors, this recovery isn’t full and sectors like food are still struggling.

    In 2020, the UK and EU agreed on a provisional free-trade agreement which helped both parties to trade without any additional tariffs or quotas.

    Impact of Brexit on the UK Economy EU and non EU exports between December 2018 and December 2021 StudySmarter OriginalsFigure 1. EU and non-EU exports between December 2018 and December 2021, StudySmarter Originals. Source: ONS, www.ons.gov.uk

    Figure 1 shows the exports of EU and non-EU countries. The Brexit transition period ended in December 2020, when we can see a sharp decline in EU exports.

    Impact of Brexit on the UK Economy EU and non EU imports between December 2018 and December 2021 StudySmarter OriginalsFigure 2. EU and non-EU imports between December 2018 and December 2021, StudySmarter Originals. Source: ONS, www.ons.gov.uk

    Figure 2 shows EU and non-EU imports. The end of the Brexit transition period was at the end of December 2020. After this date, we can see a sharp decline in EU imports.

    The Impact of Brexit on the UK's Trade

    The UK's trade declined after the country left the EU. There was a decline of almost 15% in trade with the EU in October 2021. There was also a decline of 35.2% in the UK imports of financial services from the EU.2

    Furthermore, from January 2022, it may be required to do a customs declaration for imports from the EU and it will be required to perform more physical inspections of food products. This may result in further reduction of trade between the UK and the EU.

    The Impact of Brexit on the International Trade

    International trade of the UK's goods and services with the EU also showed a decline after Brexit. It had declined sharply at the start of the pandemic, it started recovering and then declined again when Brexit was finalised.

    In terms of financial services, the UK's international trade improved with non-EU countries such as China, Singapore, and South Korea.

    The UK's relations with other countries like China and USA improved due to the lower pound rate and comparatively lower tariffs.

    The Impact of Brexit on the UK’s Automobile Industry

    The UK automotive industry adds about £15.3 billion to the UK's economy.

    The UK imported about 70% of its cars from the European market and the EU is the main market for the UK's export cars. However, in 2020, the sales of cars were significantly less than in the previous year.

    Giant manufacturers like Honda, Nissan, and even Ford saw the impacts of Brexit. The Honda company had to shut down its one plant in Swindon. Nissan and Ford also warned of their pulling out if no trade deal was signed.

    Brexit indirectly impacted the employment rate in the UK, as these companies that employ huge numbers of people. Jaguar Land Rover made almost 1000 employees redundant in 2017.

    However, with the trade deal announcement, now companies like Nissan decided to keep their manufacturing ongoing and also shift their production for EV Cars from the US to the UK to avoid huge export tariffs to the EU.

    The UK's non-EU imports have increased to 16% due to the import of Tesla cars from the US and China.

    The Impact of Brexit on the UK's Labour Market

    As we said at the beginning, the UK has faced high labour shortages since Brexit. These are the result of the new and stricter immigration rules. About 2,000,000 EU nationals left Britain by 2020 which resulted in a shortage of staff in sectors like retail, drivers, and hospitality.

    Seeing the impact of the fuel crunch due to the shortage of tanker drivers, the PM decided to ease out immigration rules for EU drivers and citizens.

    Impact of Brexit on UK Economy - Key Takeaways

    • The impact of Brexit on the UK economy was highly visible in the employment rates, trade, investments, exports, imports, and even on the automobile industry even before it happened.
    • The FTSE 100 share index has been very volatile and still unstable for the future.
    • There was a decline of almost 15% in trade with the EU in October 2021.
    • London was replaced by Amsterdam for European share trading and London's derivative share trading lost ¾ of its euro volume to Amsterdam and New York.
    • The UK's international trade with non-EU countries such as China, Singapore, and South Korea in terms of financial services imports improved.
    • The UK's non-EU imports have increased to 16% due to the import of Tesla cars from the US and China.
    • About 2,00,000 EU nationals left Britain by 2020 which resulted in a shortage of staff in sectors like retail, drivers, and hospitality.

    Sources

    1. The initial impact of Brexit on UK trade with the EU’, Office for Budget Responsibility, 2021.

    2. ‘UK–EU future relationship: financial services’, Institute for Government, 2021.

    Frequently Asked Questions about Impact of Brexit on UK Economy

    What is the impact of Brexit on the UK economy?

    Brexit had a large impact on the UK's economy. These impacts were positive and negative.

     

    Some positive impacts are:

    • Free movement of trade with other non-EU countries.
    • The devaluation of the pound makes exports cheaper.
    • Opportunity for growth by trading with emerging economies.

     

    Some negative impacts are:

    • The decline in UK's economic growth.
    • An increase in inflation and the costs of living. 
    • A reduction in business investments. 
    • A fall in confidence in the UK economy.

    What impact has Brexit had on the UK-EU trade? 

    The UK's trade declined almost 15% after it left the EU. 


    There was a decline of 35.2% in the UK imports of financial services from the EU.

    How has Brexit affected the UK financial markets? 

    Since Brexit, the UK financial market has been very volatile and has not returned to its levels before Brexit. 

     



    How will Brexit affect UK multinational companies? 

    Giant multinational companies like Honda, Nissan, and even Ford are facing the impacts of Brexit. The Honda company had to shut down its one plant in Swindon. Nissan and Ford also warned of their pulling out if no trade deal was signed. 

     

    Apart from that many financial institutions and banks moved their operation from the UK to the EU.

    What is the impact of Brexit on international trade?

    Since the UK has the freedom to pursue its own trade deals, it can make trade deals with many countries, improving global free trade. However, trade between the UK and the EU could significantly drop.

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