MercoPress. South Atlantic News Agency

Tenth anniversary of Brexit, UK GDP per head cost of 8% in 2025, LSE professor estimates

Falklands were hit hard with tariffs and quotas in its exports to EU because of Brexit

Ten years ago, June 2016, the UK voted to leave the EU and since then, an extensive body of research has studied the impact of Brexit on the UK economy.

Researchers have analyzed how the June 2016 vote, the January 2020 departure from the EU and the January 2021 implementation of the Trade and Cooperation Agreement (TCA) have affected prices, wages, employment, domestic and foreign investment, output, productivity, trade and financial markets among many other outcomes.

(And let us not forget the impact of Brexit on British Overseas Territories, in particular for the Falkland Islands which since then have faced tariffs and quotas on its exports to the European Union, which before was a fluid, no impediments bilateral relation.)

A report from Associate Professor, the Department of Economics, London School of Economics, Thomas Sampson, published in the LSE newsletter, points out that the overall findings are emphatic, Brexit has made the UK poorer than it would have been had the UK remained in the EU. The best available estimates imply that by the end of 2019 Brexit had reduced UK GDP by 2 per cent to 3 per cent. Quantifying the impacts from 2020 onwards is harder because of the Covid-19 pandemic and energy price shocks following Russia’s invasion of Ukraine. But recent analysis suggests that the costs have risen over time and that Brexit may have reduced UK GDP per head by as much as 8 per cent by the start of 2025.

An 8 per cent decline would represent a loss of £3,300 per person in 2024.The overall findings are emphatic: Brexit has made the UK poorer than it would have been had the UK remained in the EU.

The paper from Professor Sampson published in the LSE post focuses on three channels through which Brexit has hurt the UK economy: import prices, uncertainty and trade barriers. For each of these channels, there is a considerable body of evidence documenting the negative effects of Brexit.

The consequences of the Brexit vote first became visible in financial markets. In the days following the referendum, share prices fell and the value of sterling declined. Because asset prices depend on beliefs about future economic performance, these drops indicate that market traders expected Brexit to hurt the UK economy – a view that has subsequently proved correct.

Share prices mostly rebounded from their initial falls in the months that followed. But sterling did not. The referendum caused a persistent decline in the value of the pound by around 10 per cent. And the weaker pound led to a deterioration in the UK’s terms of trade as imports became more expensive. This increase in import prices was the first channel through which UK consumers and workers felt the economic effects of Brexit. Higher import costs raised the cost of living; the fall in sterling is estimated to have increased consumer prices by around 3 per cent, costing the average UK household £870 per year. The rise in the cost of imported intermediate inputs also hit firms, increasing their production costs and contributing to lower growth in real wages.

The second channel through which the Brexit vote affected the UK economy was a sharp and sustained rise in uncertainty. The referendum did not specify when Brexit would occur, or what form the new UK-EU relationship would take. Consequently, it created uncertainty about future UK-EU relations: what policies would change; when would they change; and how large any increases in trade barriers between the UK and the EU would be.

This uncertainty was exacerbated by the chaotic nature of UK politics between 2016 and 2020, as successive prime ministers struggled to build a consensus on what the country wanted from Brexit, and many opposition MPs campaigned to stop Brexit altogether.

In the face of uncertainty, businesses often adopt a “wait and see” approach, putting new investment projects on hold. This is what happened during the Brexit negotiations. Business investment in the UK grew less quickly following the referendum, particularly among firms that were more dependent on EU markets and, therefore, more exposed to Brexit-related uncertainty. Brexit is estimated to have reduced UK business investment by around 15 per cent in 2024, and less investment leads to lower productivity and output.

The last channel is international trade. In January 2021, the UK left the EU’s single market and customs union, and entered a free trade agreement (TCA) with the EU. The TCA mandates zero tariffs and zero quotas on UK-EU trade, but it does not guarantee the near-frictionless trade that occurs within the EU. Consequently, the TCA has led to the creation of a customs and regulatory border between the UK and the EU, resulting in higher barriers to trade.

Exporters and importers now face customs checks, rules of origin requirements, regulatory compliance burdens and restrictions on business-related travel. All these new barriers have increased the costs of doing business with the EU.

Unsurprisingly, higher trade costs have led to less trade. The TCA is estimated to have reduced UK goods exports to the EU by 10 per cent to15 per cent, with smaller firms particularly hard hit) and services exports by 4 per cent to 5 per cent). Among UK firms that exported goods to the EU prior to Brexit, around one in seven have stopped exporting to the EU because of the TCA – a loss of 16,400 exporters.

The government’s “global Britain” strategy of promoting export growth beyond Europe has not mitigated these losses. There is no evidence that the decline in exports to the EU has been offset by increased exports to non-EU countries.

Goods imports from the EU have also fallen. But importers have partially compensated for these falls by sourcing more from outside the EU. Consequently, the TCA has only reduced goods imports from EU and non-EU countries combined by around 4 per cent.