Analysis of Brexit

Edit: this research was done prior to the recent volatility in the UK markets.

Background

It is the withdrawal of the UK from the EU after having voted to leave in 2016. It officially left the trading bloc on 31 January 2020. After leaving the bloc, the UK and EU agreed to keep the status quo on several issues until the end of the year. This gave them time to agree to the terms of a new trade deal. They came to an agreement on 24 December 2020. 

It seems that leaving the EU was due to several factors, including how Brits felt that being in the EU wasn't all that beneficial, unhappiness following the 2008 recession, and the Arab Spring refugee crisis (Essex). 

What are some implications of Brexit?
There is now a restriction to work and living across the border, as well as restrictions on trade and travelling. UK nationals now need a visa if they want to stay in the EU for more than 90 days in a 180-day period. The UK has also become less open with its exit from the EU, which is detrimental to its economy and its growth. It is now less open and competitive (Bloomberg), which ultimately affects its growth. As a whole, the UK’s total trade as a percentage of GDP fell by 8% since 2019, and the country has lost market share in 3 of its largest non-EU import market in 2021 (US, Canada, Japan). The UK will be expected to grow by 3.6% in 2022, and zero growth in 2023, which renders it the slowest growing among the G7 (Guardian). This could trickle down to the individual as an analysis by LSE mentioned that the reduced productivity and lower salaries may result in employees earning 500 pounds less per year by 2030 (Reuters).

With the close integration of the UK and the EU, the impact of Brexit has certainly been reflected in the EU as it has on the UK. For example, with the decreased movement of goods and labour across the border, the EU will likely experience a decrease in labour supply in the financial sector because of the UK’s status as a financial hub in Europe. The market size of the UK is much smaller compared to the EU, so I expect that the decreased labour supply and trade across both regions is likely to affect the EU to a lesser extent. 

The effect of Brexit is not the same for every sector
Sectors that are heavily reliant on cross-border supply chains are among the worst-hit, like electrical equipment manufacturing. The fishing industry was also expected to shrink by 30% with the increased regulations for their catch to their customers in the EU (Reuters). On the other hand, some sectors might actually benefit from Brexit, or at least remain unaffected (Bloomberg). Sectors that focus on service will “remain largely unaffected”, and those that focus on supplying the UK market will benefit from the decreased import of goods and services. One example is food manufacturing, a key industry in the east of England that is set to thrive because it supplies the UK market. 

A silver lining for the UK
There is a glimpse of a rebounding system of economic governance in the UK (Bloomberg). It has started to improve regulation for businesses and consumers by enhancing competition and technology. Trade-wise, exports and imports to and from the EU have increased to above pre-pandemic levels, signalling a reignition of their collaborations.

My thoughts on the future
In order for the UK to retain its position as a hub in Europe and globally over the long run, it will have to make adjustments and establish new trade relations with other countries and trading blocks. Brexit was majorly supported by the older generations while younger generations supported staying. This could mean that in the future, the UK might choose to return to the bloc once the younger generation takes over unless Brexit proves to be the better decision for them (Bloomberg). Ultimately, the direction of the EU economy will not be as affected by Brexit as it has been by the Russia-Ukraine war. If the EU and UK can come to a consensus on a fair-trade deal, I believe this will be the most beneficial to both parties.