What is the impact of Brexit on UK’s Economic Growth

What is the impact of Brexit on UK’s Economic Growth

Introduction

Over the past couple of years, the debate on economic impacts of Brexit has increased considerably. This has increased concern in the sense that Brexit may negatively impact the UK’s economic growth. In this light, HM Treasury (2016) elucidates that European Union usually has a positive impact on the UK’s trade hence; an exit means that its trade would be affected negatively. Given to the fact that EU is the single largest market, it plays a fundamental role in shaping global trade management. In this view, a referendum vote is indicative of discord within the European Union, which is likely to have an impact on the UK’s economic growth. Taking this into consideration, this essay seeks to elucidate on the positive and negative impacts of Brexit on the UK economic growth.

Methodology

 The research will use quantitative methods in obtaining the data.  Precisely, secondary data will be collected from various databases such as IMF, OECD, KPMG, and NIESR among others database. The researchers will collect data on various economic indicators over a period of twelve months since Brexit.  These include inflation, interest rates, GDP per capita, and employment rates among others. 

This research will use Neo-functionalism and Intergovernmentalism theories. Neo-functionalism theory explains how cooperation in certain economic policy can lead to enhanced economic integration in Europe in terms of spillover (Cini, 2016). Intergovernmentalism explains the role of a nation in integration and argues that a nation does not become obsolete as a result of European integration (Schmidt, 2016).

The impact of Brexit on UK’s Economic Growth

One of the impacts is reduced attractiveness of the United Kingdom as a gateway to Europe.  As such, Gudgin et al., (2016) stipulate that UK is usually the largest recipient of FDI in the EU and an exit means a reduction of investment from the EU, which is considered as a major source of FDI in the United Kingdom.  A research from NIESR (2016) on 1200 major Europeans firms revealed that 80 percent of the firms were planning to slow their investment in the UK upon the Brexit while 28 percent of the firm was planning to move their activity. Also, 15 percent of the firms intended to stop their activities in the United Kingdom (NIESR, 2016). From this it is deducible that Brexit has a negative impact on the UK economic growth as FDI play a considerable role in the economic development.

 OECD (2016) informs that a negative effect on trade is also a major impact of Brexit. As such, UE is regarded as a major trading partner of the UK given to the fact that EU consumes more than 45 percent of the exports from UK (OECD, 2016). As a result, EU plays a fundamental role in the economy of UK given that its exports account for approximately 30 percent of its GDP.  As such, Brexit means there will be tariffs on goods as well as non-tariffs on goods and services, for instance, customs controls. This, in turn, will increase the trade cost on the UK exports for the EU.  On the other hand,   increased import inflation as a result of increased trade cost would lead to a reduction in the disposable income of the households, and as a result, their purchasing power will be reduced (International Monetary Fund, 2017). Besides, UK gets half of its imports from the EU. This means that the cost of imports would be high due to trade barriers.  Consequently, IMF stated that Brexit would lead to long-run losses in income given that barriers would reduce and affect the trade, productivity as well as investments. This, in turn, would negatively affect the country’s GDP and in turn impact on the economic growth.

According to IMF, London is a global financial center and an exit means that it would lose its “passport” rights to offer financial services to the rest of the EU states (IMF, 2016).  On this, these rights ensure that Europeans, as well as non-Europeans financial companies located in the UK, can offer their services to EU single market from one location.  Therefore, a probable income of Brexit is that London will lose these rights and London will not be a global financial center and hence economic activities related to finance will be negatively influenced.  The resulting effect negatively impacts on the Foreign Direct Investments, which will be depicted in the negative effect on the economy.

Brexit would also impact productivity negatively, which will affect the economic growth. In this view, reduction in FDI means that negative impact on the capital stock, which will directly strain growth of productivity.  Reduction in FDI in R&D would mean reduction of the domestic innovative capacity. This is supported by Branstetter (2006) who argues that international knowledge which has been developed abroad has a considerable impact on the local productivity.  Besides,   deterioration of the business climate, as well as strict migration policy, would trigger skilled immigrant to leave the UK.  In support of this,   KPMG conducted a survey in 2017, which revealed that among the 2000 European Union immigrants working in the UK, 8 percent of them planned on leaving UK while 35 percent were considering leaving (KPMG, 2017). As such, most of the high-skilled and young immigrants were considering leaving which means the risk of brain drain as well as loss of skills (OECD, 2016). As a result, productivity would be affected negatively and this would be reflected in the slow growth of the economy or no growth at all.

A research conducted by Van Reenen (2016) revealed the negative implication of Brexit to the UK’s economy. Precisely, the researcher observed that the UK would experience a decrease in living standards from 1.28% to 2.61% (Van Reenen, 2016). The cost of living standards worsened given to the increased cost of importing clothes, foods, and fuel, which pushed the inflation high. Besides, the welfare would decrease from 9.5 percent to 6.3 percent.  These reductions would come as a result of a decline in FDI, productivity as well as the intensity of Research and Development.

 Despite the negative impacts of Brexit on UK’s economy, it is also expected to have positive implications for the economic growth.  In particular, the UK budget of contributing to EU budget will considerably be reduced. UK contributes approximately 8bn pounds annually, which the largest pay to EU after the France and Germany (NIESR 2016). This means that Brexit will save approximately 8bn, which is normally paid to EU annually.  This, would impact the  UK’s economy positively.  Therefore, Brexit would be a conventional saving opportunity in which the UK government would allocate the money to other activities aimed at enhancing economic growth.

Conclusion

In conclusion, it is deducible that Brexit has both positive and negative implication on the UK’s economy. In particular, this essay has established that the UK productivity will be affected negatively, which in turn will affect the economic growth negatively. Reduction in FDI means low capital stock which will hold the growth of productivity. Besides, this essay has established that the trade and FDI will be affected by Brexit. In this view, Brexit will lead to high tariffs and increased cost of trade. As a result, increased import inflation as a result of increased trade cost would lead to a reduction in disposable income of the households, which will, in turn, reduce their purchasing power. The other negative consequence is worsening of living standards and welfare. These would be as a result of decreased FDI, productivity as well as increased cost of trade. However, Brexit is also expected to have positive implication such as saving on government spending that is usually contributed to EU annually. Therefore, it is deducible that Brexit has both negative and positive implications but the negative impacts outweigh the positive impacts.

References

Branstetter, L. 2006. Is foreign direct investment a channel of knowledge spillovers? Evidence from Japan’s FDI in the United States. Journal of International Economics, 68(2), pp.325-344.

Cini, M. 2016. European union politics. Oxford University Press.

Gudgin, G., Coutts, K., Gibson, N., & Buchanan, J. 2016. The macro-economic impact of Brexit: using the CBR macro-economic model of the UK economy (UKMOD). Centre for Business Research, University of Cambridge.

HM Treasury .2016. HM Treasury analysis: The long-term economic impact of EU membership and the alternatives, HM Government.

International Monetary Fund (IMF). 2017. Staff Concluding Statement of the 2017 Article IV Mission. Available at: https://www.imf.org/en/News/Articles/2017/12/19/mcs122017-united-kingdom-staff-concluding-statement-of-the-2017-article-iv-mission  13th Mar. 2018. Washington

International Monetary Fund (IMF). 2016. Staff2016 Article IV Consultation Concluding Statement of the Mission. Available at: Available at: http://www.imf.org/en/News/Articles/2015/09/28/04/52/mcs051316 13thMar. 2018. Washington

KPMG. 2017. The Brexit effect on EU nationals – A survey on what European workers will do now.

NIESR .2016. The long-term economic impact of leaving the EU. National Institute of Economic and Social Research, pp.121-238

OECD . 2016. The economic consequences of Brexit: A taxing decision. OECD Economic Policy Paper, 16, pp.1-36.

Schmidt, A. V .2016. ‘The New EU Governance: New Intergovernmentalism, New Supranationalism, and New Parliamentarism’, Journal of Contemporary European Research. 1 (1), pp.864 – 871

Van Reenen, J. 2016. Brexit’s Long-Run Effects on the UK Economy. Brookings Papers on Economic Activity2016 (2), pp. 367-383.

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