MNI INTERVIEW: Brexit Productivity Hit Fades, GDP Hit Stays

UK productivity growth may be picking up after taking a hit from Brexit, but output will remain 6-8% lower than if the country had stayed in the European Union, one of the authors of a newly-published paper comparing the performance of the economy since the 2016 referendum to those of other OECD countries told MNI.

"I don't expect the gap [between the UK and comparable countries] to get any bigger, but I don't expect the gap to get any smaller really either," Gregory Thwaites, Research Director at the Resolution Foundation and co-author of the paper alongside a Bank of England and Deutsche Bundesbank economist, said in a phone interview. "My best guess would be that the gap was going to stay at that level."

Early estimates of the effect of Brexit, including by the official fiscal forecaster, the Office for Budget Responsibility, and at the Bank, centred on a hit to GDP of 4% but these were based on trade models. Researchers are now able to assess the real impact by looking at firm level data collected after the UK left the EU in 2020.

"The optimistic case of productivity growth in the UK is that there was this drag on productivity growth, which has basically stopped now that the Brexit effect has come through, and we're not going to make up the lost ground, but growth is going to pick up so that the gap with Europe doesn't get any bigger," Thwaites said.

"I think the costs associated with Brexit are now largely to do with increased trade costs and the associated reduced demand for UK goods, and then also reduced availability of goods from Europe so it costs more to get them in," he said.

OBR FORECASTS

Since Brexit, the OBR has consistently overestimated UK productivity growth. An expected downgrade to its productivity growth forecast will make the government's fiscal rules harder to meet. (See MNI INTERVIEW: OBR To Cut Trend GDP, Make UK Fiscal Job Harder)

"One explanation for [the UK's low productivity growth in the last decade] is that the Brexit effects have been bigger than we thought they were going to be," he said, adding that this does not mean that the OBR should reflect this in its new forecasts ahead of the Nov 26 budget.

"You could say that growth been very low over the last few years ... but now Brexit is done, the economy is going to start growing a bit faster, again, not fast enough to catch up with the lost ground, but just as fast as we thought it was going to grow before we were disappointed,” Thwaites said.

"I don't think the Brexit effect is likely to go away, but that doesn't mean you can't do things to improve GDP," he said, noting that "boosting business investment through planning reform, increasing public investment or reforming the tax system" could improve growth.

BOE Monetary Policy Committee member Swati Dhingra, who has conducted extensive work on Brexit, has cited other recent work on its detailed impact on sectors, with varying effects depending on firm size and hits on cross-border banking.