9. INDUSTRY, INNOVATION, AND INFRASTRUCTURE

British economy 5pc smaller because of Brexit, claims Goldman Sachs

Written by Amanda

Britain’s economy is 5pc smaller than it would have been without Brexit and leaving the EU has made the inflation crisis worse, analysts at Goldman Sachs have claimed.

Economists James Moberly and Sven Jari Stehn at the US investment bank argued that the economy was suffering “a significant long-run output cost of Brexit” in a note sent to investors.

Trade, migration and business investment have all taken a hit since the Brexit referendum in ways which held back GDP growth, they argued.

The analysts wrote: “The UK economy has notably underperformed other advanced economies since the EU referendum in June 2016.

“UK real GDP per capita has barely risen above pre-Covid levels and now stands 4pc above the mid-2016 level. This compares with 8pc for the eurozone and 15pc for the US.”

The economists said comparison to a model of a “Doppelganger” Britain that had remained in the EU suggested that the economy was now 5pc smaller than it otherwise would have been had it remained in the bloc.

Mr Moberly and Mr Jari Stehn acknowledged “significant uncertainty” over their estimate, putting the potential range of the hit to GDP at between 4pc and 8pc.

Other economists said Goldman’s estimate exaggerated the impact of leaving the EU and laid the blame for underperformance at the door of the Bank of England, rather than Brexit.

Mr Moberly and Mr Jari Stehn also noted that in some areas, such as trade in services, the economy has performed better than expected.

The bank’s Brexit forecasts have in the past proved misguided. Goldman Sachs predicted the UK would fall into a recession if it left the EU at the time of the referendum, a fate which the economy ultimately avoided.

In the new investment note sent to clients last week, Goldman Sachs said the cost of living had jumped by 31pc in the UK since the vote to leave the EU. This is worse than the 27pc increase seen over the same period in the US and the 24pc rise in the eurozone.

Mr Moberly and Mr Jari Stehn said trade in goods had fallen since the Brexit vote, even as it rose across G7 countries on average. At the same time, “investment growth stalled after the referendum, falling significantly below its pre-2016 trend.”

Changes in immigration since Brexit have also hit the economy, the pair argued. Although overall migration has jumped since Brexit, “many recent arrivals are students, meaning that immigration may be playing less of a role in boosting labour supply than the headline numbers suggest”, they wrote.

“EU immigrants tended to have high labour market participation rates, as many of them entered the UK specifically to work.”

Jonathan Portes, professor at King’s College London and senior fellow at the think tank UK in a Changing Europe, said Goldman’s estimate of the economic impact of Brexit was too high. He said the impact was more likely in the region of 2pc to 3pc of GDP.

The Institute of Economics Affairs said the inflation crisis was worse in Britain than other advanced economies because the Bank of England over-stimulated the economy with low interest rates, not because of Brexit.

Julian Jessop, fellow at the IEA, said the analysis “ignores many other factors that may also have changed, including the different impacts of shocks such as Covid and the energy crisis, and the different policy responses in individual countries”.

He added: “These models also assume that any hit from Brexit is permanent and irreversible. Investment in particular should continue to recover as uncertainty clears.

“Exports and imports should also pick up again as businesses adjust and as new trade deals come online.”

A Treasury spokesman said: “The UK has grown faster than Germany since leaving the EU and the IMF has said our medium-term growth outlook is brighter than many of our neighbours on the Continent, including France and Germany.

“The Government is making the most of Brexit freedoms to grow the economy, including repealing financial services law inherited from the EU so we can unlock reforms with the potential for £100bn in investment over 10 years.”

Source: telegraph.co.uk

About the author

Amanda

Hi there, I am Amanda and I work as an editor at impactinvesting.ai;  if you are interested in my services, please reach me at amanda.impactinvesting.ai