Whenever Andrew Bailey, the governor of the Bank of England, talks about the economy, he is forced to mention the toll taken by Brexit.
Business leaders, initially reluctant to criticise the Tory decision to quit the EU, have begun to find their voice. Most recently, leading City figure Guy Hands called Brexit a “complete disaster” and a “bunch of total lies” that has harmed large parts of the economy.
Maybe, given the mounting evidence, it is unsurprising that business leaders, ministers and the shadow Labour team are meeting in secret to discuss how they can turn the situation around.
On Friday, the government was hit by the latest blow. AstraZeneca, the pharmaceutical firm lauded for providing its Covid-19 vaccine at cost to the UK and developing-world countries, said it would make Ireland the location of a new factory once destined to nestle near its existing UK manufacturing centres in north-west England. Before Brexit, the UK’s pharma industry benefited from £2bn of EU research funding. No longer.
In a report earlier this month, Bailey said the impact of leaving the EU’s single market and customs union was being felt more acutely on the UK’s trade than first estimated. As recently as November, the central bank believed some of the administrative hold-ups at the border and the unwillingness of exporters to overcome the mountain of paperwork and extra costs they face to send goods to the EU would have faded by now. It has not.
The Office for National Statistics said the gap between UK exports and imports grew by £2.4bn to £26.8bn, making it clear the shortfall was “driven by lower exports of both goods and services”.
Another significant measure of the economy’s health – business investment – has also suffered. It stalled after the 2016 referendum and remained flat until late 2019, when it fell off a cliff. Friday’s official figures for the year to December 2022 showed the level of funding for new equipment, machinery and IT systems had almost, but not quite, recovered the lost ground.
The Office for Budget Responsibility, which will provide forecasts that underpin Jeremy Hunt’s budget in March, is likely to say that this struggle to encourage investment is one of the government’s biggest problems when calculating how much money the private sector can generate over the rest of the decade.
Without investment, firms continue to rely on legions of workers to carry out tasks rather than the latest equipment, a problem when so many skilled people have taken early retirement or returned to their homeland following Brexit. The shortage of workers in the UK is cited by the central bank as the main reason for rising wages and the potential for inflation to stay high for longer than it would otherwise.
This threat of a long inflationary period is the main justification for interest-rate increases – and high interest rates are one of the main reasons the UK is likely to experience a recession this year.
Investment should make the workplace more productive, making firms more profitable and bigger, better taxpayers. Brexit has chased away many of the big foreign firms that once used the UK as a base inside the single market and discouraged domestic firms from expanding EU trade. As self-inflicted disasters go, it ranks as one of the worst in modern economic history.
