The cost of Brexit revisited

Last week the Office for Budget Responsibility reduced its growth forecast for the UK for 2019 to 1.2% and on Monday, the British Chambers of Commerce (BCC) followed suit and now predicts the same rate of growth. More importantly, the BCC expects investments to fall by 1.0% even in the case of an orderly Brexit because the preparations for a yet unknown exit from the EU diverts resources from productive use.

And while these numbers look bad, we should not forget that Brexit uncertainty has likely already caused a lot of trouble in the UK economy. In our Market Outlook Q4 2018 published on 18 September 2018, we used a model based on academic research to estimate how much GDP growth, consumption and investment has been lost due to the ongoing uncertainty around Brexit. The basic idea behind the model is to simulate the UK economy, up to the Brexit referendum as a combination of different economies around the world. This “Frankenstein UK” is a combination of countries like the US, Canada, New Zealand and Ireland, but also Hungary and Japan. If we use the local economic developments of these countries after the Brexit referendum and combine them into the “Frankenstein UK” we can compare the development with the actual development of the UK economy since the referendum.

Six months ago, we estimated that the UK economy will be 2.7% smaller at the end of March 2019 than in an alternate universe where the country would have decided to stay in the EU. Similarly, we expected investments to be 8.6% smaller and consumption to be 2.5% smaller than in the case of no Brexit.

Now that we are approaching the end of March deadline it is worthwhile to update these calculations. Our chart shows the latest estimates for lost GDP and lost investments. Because GDP growth in countries like Hungary and Ireland has been strong in 2018 with annualised growth rates above 5% while the UK has meandered along at c. 1.3%, the estimated loss in output has increased significantly since our last estimate. Our model indicates that the UK will have lost 3.25% in real economic output and 11.0% in investments at the end of March. Consumption is estimated to be 3.1% lower than without Brexit. To put that in numbers that is a loss of GDP of c. £16.6bn every three months and counting. In essence, what happened was that many countries in the US and Europe had strong growth, particularly in the first half of 2018 and that the UK would likely have enjoyed reasonably strong growth as well in 2018 were it not for the Brexit uncertainty.

This exercise in “taking back control” has been incredibly expensive already and the costs increase at a faster and faster rate as the deadline gets extended.

Estimated loss of output and investments in the UK

Source: OECD, Bloomberg, Fidante Capital.