How Brexit 'drag' took British economy off course

Brexit has significantly hampered the British economy, creating what economists call "drag" – a force that causes an economy to underperform relative to its potential. This effect is comparable to aerodynamic drag on a race car, where even small inefficiencies slow it down considerably over time. The United Kingdom formally left the European Union on January 31, 2020. Replacing the smooth integration of the EU single market with the complexities of a "third country" trading regime has introduced substantial economic friction, impacting roughly half of the UK's trade.

While the precise economic consequences were debated before the Brexit referendum, a decade of data now provides a clearer picture. A working paper from the National Bureau of Economic Research, authored by economists from Stanford University, the Bank of England, the German Bundesbank, King's College London, and the University of Nottingham, offers a comprehensive analysis. Their findings, presented to European and US central banks and universities, conclude that Brexit has led to a 6% to 8% reduction in UK GDP, a 12% to 18% decrease in investment, a 3% to 4% drop in productivity, and a similar 3% to 4% decline in employment.

The researchers identified several drivers for this underperformance, including heightened uncertainty, reduced demand, diverted management attention, and a misallocation of resources stemming from the protracted Brexit process. The paper suggests that initial predictions about Brexit's effects were accurate over a five-year horizon but underestimated the impact over a full decade. The cumulative effect of these seemingly small economic adjustments has grown significantly over time, as evidenced by the UK's Office for Budget Responsibility, a fiscal watchdog.

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Brexit means Brexit