The long Brexit process was concluded on 1st January, as the UK left the single market and the customs union and the EU-UK Trade and Cooperation Agreement entered into force. If the proof is in the pudding, January 1st marks the moment the Brexit pudding could be taken out of the oven, ready for consumption. Exactly how it will taste, though, we still don’t know.
It would be simplistic to reduce Brexit to just economics. But it raises many economic questions as yet unanswered. Will global Britain indeed prosper mightily, unshackled from European regulation and red tape, taking advantages of opportunities elsewhere? Or, on the contrary, will increased barriers with the UK’s largest trade partner leave us behind the rest of Europe, with an estimated loss of four per cent of potential GDP according the UK Office for Budget Responsibility? How will we judge Brexit’s economic success?
The current reporting is understandably focused on border disruption. But that is likely to be short-lived as traders, authorities and supply chains adapt and the new paperwork becomes standard procedure. Likewise, because current economic activity is determined more by Covid than by Brexit, the success of Brexit can only be evaluated over several years. Economic figures for 2020 and 2021 will not give a meaningful picture.
Much has been made of the UK’s stature as the world’s fifth largest economy, just larger than India, as measured by nominal GDP. But this is not so much a measure of prosperity as of economic power, and the measure is unlikely to favour the UK or other European countries in the long run as densely populated Asian countries catch up with their Western peers. Moreover, it is heavily affected by exchange rates, and short-term fluctuations tell us more about the relative health of the British pound than the British economy.
Far better, then, to look at per capita GDP, adjusted for price differences between countries to gain a better approximation of variations in living standards. Examine this well-known measure and it reveals some important trends. Nominally, UK GDP per capita was almost 20 per cent higher than the EU27 average in 2019, but since prices in the UK are about 15 per cent higher as well, the UK was in fact only four per cent wealthier than the EU when its GDP is adjusted using the purchasing power standard (PPS). In comparison, France and the Eurozone as a whole are about six per cent richer than the EU average, while Germany is 20 per cent richer by the same measure.
More worrying for Britons is the trajectory: the UK was 11 per cent richer than the EU27 in 2015 and 13 per cent richer in 2008. Some of this relative decline can be explained by a combination of austerity after the financial crisis and investment uncertainty after the referendum, while formerly Communist countries have been growing faster as their living standards catch up. However, the UK is also blessed with many advantages—its language the global lingua franca, its universities among the best in the world, and its strategic location between the two largest markets on the planet. It should do better than it does.
GDP per capita is not a complete measure of a nation’s well-being, and a serious assessment would take multiple factors into account, such as trade figures, income distribution, and health. However, it is nevertheless the single best measure that we have. If the UK outperforms the EU27 and in particular France and Germany over the next five to 10 years, Brexiteers can rightly say they’ve made an economic success of it. If the growth trajectory worsens, Remainers can at least get the satisfaction of being right about their predictions. And if there is no change and the UK continues to muddle through, it might prove at last a good opportunity to look inwards for both the causes and the solutions to the problems facing the UK.
