Brits are starting to think about Brexit again as the economy slides into recession

Anti-Brexit protester Steve Bray (left) and a pro-Brexit protester argue as they demonstrate outside the Houses of Parliament in Westminster on January 8, 2019 in London, England.

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The UK’s growth prospects lag behind even those of Germany, whose economy is particularly exposed to rising energy prices due to its dependence on gas imports from Russia. The OECD said “persistent uncertainty” along with rising capital costs will continue to weigh on business investment in the UK, which has fallen sharply since Brexit.

The UK’s independent Office for Budget Responsibility (OBR) has offered a bleaker outlook, forecasting GDP to contract by 1.4% in 2023, even as the Bank of England and the government are forced to tighten policy monetary and fiscal measures to contain inflation and prevent the economy from overheating.

The OBR said in its economic and fiscal outlook last week that its trade forecasts reflected the assumption that Brexit would result in a lower UK trade intensity (the integration of an economy with the world economy) by 15% in the long run than if the country had remained in the EU.

Commercial intensity declining

In May, the OBR estimated that the UK’s new terms of trade with the EU, set out in the trade and cooperation agreement (TCA) which entered into force on 1 January 2021, will reduce long-term productivity by 4 % compared to the previous trajectory was that the UK remained in the EU.

The Bank of England’s Monetary Policy Committee has issued a similar projection, and former BOE politician Michael Saunders told CNBC on Monday that a key factor in the weakness of the British economy is reduced trade intensity due to Brexit , leading to lower productivity growth.

Saunders argued that there is “abundant evidence” that increased trade intensity — or greater openness to trade on both exports and imports — boosts productivity growth.

“The UK has raised trade barriers with Europe and the trade deals that have been made with other countries are largely just maintaining the status quo of trade with third countries – there hasn’t been a significant net increase in trade intensity with non-EU countries,” he said. .

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“So the overall net effect has been a significant reduction in the UK’s trade intensity, which can be seen in the sharp declines in both imports and exports as a percentage of GDP since 2019 compared to trends in other advanced economies and compared to trends that we have seen in previous years.”

UK trade as a share of GDP has fallen from around 63% in 2019 to around 55% in 2021, while domestic productivity growth is also slow. Both the Bank of England and the OBR estimate that UK potential output has fallen sharply since Q4 2019 and will experience anemic growth over the next few years.

The New York-based Kroll Bond Rating Agency downgraded the UK even before former Prime Minister Liz Truss’ disastrous mini-budget in September sent bond markets into a tailspin.

Ken Egan, director of European sovereign credit at KBRA, told CNBC last week that Brexit marked a “turning point” for the UK as it gave rise to several structural weaknesses in the economy.

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“Part of the reason for our downgrade was a long-term view that Brexit has had and will continue to have a negative impact on the UK from a credit perspective, in terms of everything from trade to government finances to the macro side. some things”.

KBRA, like the OBR, the Bank of England, the International Monetary Fund, the OECD and most economists believe that growth will be lower in the medium term due to Brexit.

“Trade has already suffered, the currency has weakened but we haven’t seen the compensating improvement in trade, investment has really been the weak point since Brexit, business investment has indeed deteriorated quite sharply,” Egan explained .

“If you compare inflation as it stands now to that of the rest of the world, basic services, basic goods inflation in the UK appears to be much higher than in the rest of Europe. It is the idea that even if the energy crisis had ended tomorrow, you would still have these stickier inflationary pressures in the UK”

Change in public mood

Saunders said that while part of the deterioration since the fourth quarter of 2019 was due to the coronavirus pandemic, Brexit also had a role to play as rising trade barriers with the EU for businesses since early 2021 hampered the activity.

“If you don’t want to reverse Brexit completely, you can still opt for a softer Brexit than the UK has chosen to do,” he suggested.

“The UK opted for the toughest of hard Brexit and that was a choice, we could have left the EU but opted for a form of Brexit which would have placed far fewer barriers in the way of trade, the intensity of trade ne would have been less affected, productivity would be less affected over time.”

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New Prime Minister Rishi Sunak’s government is expected to pursue friendlier relations with the EU than its predecessors, Boris Johnson and Liz Truss. However, both Conservatives and Labor have ruled out any return to EU-aligned institutions out of fear of starving voters in key pro-Brexit constituencies.

However recent polls suggest that the public mood may have started to change. A frequent YouGov poll earlier this month showed that 56% of the population said Britain was “wrong” in voting to leave the EU in 2016, compared to 32% who said it was the right choice .

The 24-point deficit was the largest in a streak dating back to 2016, and nearly a fifth of Leave voters now believed Brexit was the wrong decision, which was also a record.

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