The UK economy faces a triple threat – two of which are of the Government’s making, says Paul Teasdale

The pandemic has been a shock to the economy that is different in many ways to a normal recession. However, the actions of the Government in the past six months – a hasty exit from the single market and a budget heralding a squeeze on public spending – look set to give us that traditional recession.

A recession is usually the result of insufficient spending, but with the pandemic we had an artificial suppression of spending caused by a fear of social contact rather than, say, a credit squeeze that reduces spending power. To our surprise, the Government did many of the right things to see that incomes were sustained until the fear is alleviated, and we can expect spending to return.

Like the pandemic, Brexit is unprecedented; but while one was unforeseen and beyond our control, the other is self-inflicted (though it is not the worst act of self-inflicted harm in British history – that has to be Churchill’s return to the gold standard in 1925).

The two shocks hit different parts of the economy. The effects of the pandemic are felt most strongly in personal services, hospitality, entertainment. These are particularly significant employers in cities and areas based around tourism – and much of the workforce is younger people in lower paid jobs. Many of the firms in sectors that have not lost sales through the pandemic will be hit now by departure from the single market because trade barriers particularly affect goods – that is, manufacturing, food and some retail.

There is no historical evidence on the consequences of a country leaving a successful trading union: it has never happened because the effect is predictable. Customs unions are created to lower the cost of trade – leaving would raise costs. And it is perhaps the most basic of economics axioms that higher prices lead to lower sales and output. So, there was agreement among economists over the expected costs of leaving the EU.

Forecasts made before the referendum suggested that, two years after leaving the EU, GDP would be about 2-3% lower than it would be otherwise. The longer-term effects come from three elements:

  • barriers to trade, whether tariffs or administrative, make exports more expensive so sales decline;
  • the UK becomes much less attractive as a destination for foreign direct investment (FDI) for operations serving the rest of Europe;
  • loss of sales and FDI leads to lower investment in total, so slower growth and slower productivity growth, which in turn reduces exports – this is the main influence over the next decade or more.

Those forecasts are beginning to look underestimates. Firstly, the effects were apparent even before leaving the EU. Comparing the performance of the UK economy with similar economies, by 2019 GDP was already 2% lower than it would have been, had the vote gone differently.

The deal made in December 2020 has more trade friction than anyone imagined in 2016. The Government chose to leave the single market and the customs union.

Since January there has been a steady flow of stories illustrating the consequences of leaving the single market: Scottish fishing boats staying in port because they are unable to export their catch; a 50% fall in trade through Holyhead; delivery firms suspending services to Europe; difficulties for touring musicians.

Rather than allow time to work on the difficult issues, Johnson’s team decided to just ignore them. The deal did nothing for financial services or recognition of professional qualifications. Some firms have already relocated operations and others are set to follow. Amsterdam has overtaken London as the top share-trading centre in Europe.

Perhaps more significant are stories of individual small businesses confronting higher costs for exports and imports of small quantities. When it came into being in 1993, the single market promised – and delivered – gains for small businesses able to sell to a wider market and, for consumers, more choice and lower prices. Now that is being reversed. It is not just a matter of learning new ways: each transaction involves additional administration and charges.

The agreement avoided tariffs and quotas but did virtually nothing about non-tariff barriers – in part because the Government was unwilling to accept EU standards (even though the EU is the leader in setting standards across the world). Faced with the additional costs, some small firms will stop exporting. Others will relocate some activities abroad – for example, creating new distribution centres. Indeed, advisers in the Department for International Trade have advised businesses to relocate and agencies across Europe are ready to assist.

It is still hard to get quantitative indicators. Any Brexit effect is obscured by the reduction of trade caused by the pandemic. The big fall in exports to the EU in January was largely due to teething problems, but teething problems are the result of the Government’s own incompetence: most obviously, insisting on making such a fundamental change in the middle of the Covid crisis when the work of Government and businesses was focused elsewhere. Then making it even worse by reaching a hurried deal with many gaps and completing it only a week before implementation, allowing no time for firms to prepare. And the Government failed to recruit and train enough extra officials.

When we get figures for the service sector, they will show a drop in exports but mainly due to Covid. Leaving the EU has less effect than for goods. Some exported services, such as tourism, education or film making, are consumed within the UK. In finance or professional services (e.g., architects) firms will set up branches within the EU – so the businesses will continue, but reshaped. But there will be substantial costs for the UK economy: a loss of jobs, exports and tax revenue.

This is not as great as the loss of GDP experienced in the past year but is just as serious. The economy will recover from the Covid recession – some sectors more slowly than others and they may need assistance. But the loss of exports to the EU is permanent.

Much of this was inevitable but it was possible to make preparations to avoid the worst. The blame has to be laid on Johnson. Since 2016 he has dismissed warnings as scaremongering. He cannot cope with detail, cannot look ahead, does not prepare for difficulties, and just hopes that something will turn up. This is very clear in Northern Ireland – but there one wonders if he ever intended to stick to the deal at all.

Tory MPs (and the BBC’s Laura Kuenssberg) say that the biggest problem now is the Government debt – so the chancellor is planning to cut demand further. This is economic illiteracy. However, we have had a succession of Labour leaders afraid to talk about the economy, or about Europe. Starmer has conceded that the referendum cannot be reversed but there is, then, all the more reason to challenge how the Government is going about the task of leaving. Brexit was always going to be damaging, but the damage has been compounded by incompetence in delivering it.

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