As the UK economic crisis unfolds from rising inflation and a high cost of living to sluggish productivity, experts believe the negative impact of Brexit has become more apparent, having initially been masked by the COVID-19 pandemic.
In its most recent analysis of the economic and fiscal outlook, the Office for Budget Responsibility said that Brexit “will result in the UK’s trade intensity being 15 per cent lower over the longer term than if the UK had remained in the European Union”. Trade intensity measures the integration of a national economy into the global economy.
The new study from the London School of Economics found that leaving the EU will already cost UK consumers a total of £5.8bn over the two years to the end of 2021.
Jim O’Neill, a leading British sinologist and former UK Treasury Secretary, said that while the UK faces the same global headwinds (COVID-19, energy price developments, the fragmentation of global governance and climate change policies), it has two major homegrown problems have dilemmas – weak productivity and Brexit.
“I think it’s becoming increasingly clear that Brexit is a legitimate reason why the UK is struggling. It is struggling both because of our very weak export performance to our largest market, the EU, and because of severe labor shortages in so many sectors of our economy,” he added.
Aside from Russia, the UK is expected to be the worst performer among the world’s leading economies over the next two years, according to the Organization for Economic Co-operation and Development’s latest analysis of economic prospects. The Paris-based organization has forecast that UK GDP will fall by 0.4 percent in 2023 and rise by 0.2 percent in 2024.
Michael Saunders, senior economic adviser at Oxford Economics, said: “Brexit has significantly weakened the UK economy since 2019, combined with the impact of the pandemic and the energy price shock.”
Saunders pointed out that since 2016, UK business investment has underperformed relative to other major economies.
“Lower trade intensity is bad for long-run productivity growth. Brexit is likely to continue to weigh on the UK economy for years to come,” he added.
John Beirne, deputy head of research at the Asian Development Bank Institute, a think tank, said: “Once the impact of the pandemic and the situation in Ukraine begins to subside, world trade will eventually recover. This will further illustrate the impact of Brexit on the UK’s economic trajectory given restrictions on participating fully in the recovery in global trade.”
Beirne said he believes this is also having indirect effects on other parts of the economy, exacerbating labor market tensions and productivity problems and stifling productive potential.
Inflation in the UK hit a 41-year high of 11.1 per cent in October on rising energy and food prices. In an effort to tackle the cost of living crisis and rebuild the economy, Jeremy Hunt, the country’s Chancellor of the Exchequer, outlined a £55 billion package of tax hikes and spending cuts for the UK that he said would allow for inflation and Interest rates are “significantly lower”.
However, Bank of England deputy governor Dave Ramsden told a recent conference at King’s College London that the tax hikes and spending cuts announced by Hunt are unlikely to convince the central bank to moderate a future rate hike.
Experts agree that the announced fiscal consolidation measures will help allay concerns about debt sustainability over the medium term, but will not be enough to get the UK’s economic growth on track.
“These measures aim to ensure that public finances return to a sustainable path even in a persistently weak economy,” Saunders said. “But the autumn statement didn’t include really meaningful measures to address the UK’s poor underlying economic performance. The cuts in public investment will likely make it harder to lift medium-term growth trends.”
O’Neill said the UK desperately needs a different framework – “what you might call a more imaginative and modern golden rule to enable more ambitious government investment spending. This is the only way we can really get out of our low productivity and investment trap,” he said.
The UK recession is expected to last two years, from the third quarter of 2022 to the second quarter of 2024. “A peak in the tightening cycle and a shift in the projected inflation outlook could mark a turning point in the trajectory of the economy, with policy targets gradually shifting shift from fighting inflation to stimulating growth,” said Beirne.
Saunders said the economy should get some support if, as futures markets suggest, wholesale energy prices fall over the next few years. “However, the underlying medium-term growth trend of the economy is unlikely to improve unless the government introduces a serious supply-side strategy, consisting of, for example, closer trade links with Europe, higher public investment and higher spending on education, skills and infrastructure. ” he added.
Source: China Daily
Comments are closed.