Brexit has had detrimental effects on the UK economy

Sterling has reflected the said fact as it has never reclaimed the slump we saw when the vote to leave was announced on June 23rd 2016. Supporters of Brexit did not deny there would be teething troubles but argued that things would come right in the long-term. However, it seems that things are getting worse, not better, and that could continue to weigh on the pound.

We have had over six years since the vote to leave the EU and 18 months since Brexit began. What’s the verdict? Generally, it is bad according to most assessments of the economic impact. Of course, Brexiteers will argue that these reports about the impact of Brexit are largely being done by told-you-so remainers who want to prove that Brexit is a disaster. But this is just a numbers game as it seems that the vast majority of economists thought that Brexit was a bad idea in the first place, so there’s more of them to carry out the post Brexit analyses. Brexiteers might also claim that it is hard to disentangle the effects of Brexit from the difficulties caused by the pandemic, particularly when it comes to supply chain difficulties. That’s true.

Nonetheless, we have to analyse the statistics as they stand and, as far as anyone can tell, Brexit has had detrimental effects on the UK economy, from trade openness, which has been reduced through to the labour market tightness that is causing inflationary wage pressures.

Former Bank of England Governor Mark Carney argued that Brexit could be best described as temporary deglobalisation as it cut ties with the EU while trying to build new relationships abroad. But while some new trade deals have been struck other more important ones, particularly with the US, seem very far away and could move further away if the UK breaks international law by reneging on parts of the Northern Ireland protocol.

Perhaps it is unfortunate that the UK’s own deglobalisation has coincided with worldwide deglobalisation born first of former US President Trump’s trade war with China and later catapulted further by the pandemic. The cost to the UK has been a decline in trade openness, worse trade in goods and services and increased prices.

It is no wonder that former MPC member Adam Posen described Brexit as a case of the UK declaring a trade war on itself. What’s more, it does not look as if it is going to get better, only worse. Soon-to-be MPC member Swati Dhingra has just released a report suggesting that UK workers will lose GBP470 per year through to 2030 as a result of Brexit with productivity down by 1.3%, which implies a cut of 25% in the prior decades productivity.

We could go on with more evidence about the impact of Brexit on the UK. But the key question now is whether all this bad news is reflected in sterling’s price. It could be the case that the dramatic slump in the pound following the referendum in 2016 and the subsequent lack of recovery means that sterling is properly discounting the damage that has been done and may even rally from here. Alternatively, sterling’s weakness may still be short of that required to adequately reflect the hit to the economy, particularly if these productivity estimates are correct. For as US economist Paul Krugman argues, at the end of the day productivity isn’t everything, but it is very nearly everything.

Mr. Steve Barrow, Head of Standard Bank G10 Strategy, feels that this goes for currencies too. Perhaps fortunately, it is not as if the rest of the world is going through some sort of productivity boom; quite the reverse. Hence, any UK deficit on this score may not be too noticeable. Nonetheless, it still seems that there’s scope for things to get worse for the pound. Admittedly sterling is undervalued according to traditional measures with levels around 1.40 apparently more reasonable for sterling/dollar than today’s 1.20-plus. But do these valuation levels need to come down for the post-Brexit pound? Probably. Most likely, sterling will languish at these undervalued levels for some time, possibly slipping into the 1.15-1.20 range before any longer-term recovery can start.