Brexit Slashes 5% off UK Economic Growth, Goldman Sachs Analysis Reveals
Post-Brexit Britain has been significantly underperforming compared to other advanced economies since the EU referendum in 2016, according to a recent analysis from Goldman Sachs. The Wall Street bank aimed to quantify the economic cost of the Leave vote by estimating that the UK economy grew 5% less over the past eight years than comparable countries.
The true impact of Brexit on the British economy is estimated to be somewhere between 4% to 8% of real gross domestic product (GDP). However, it is challenging to extract the specific impact of Brexit from other simultaneous economic events like the Covid-19 pandemic and the 2022 energy crisis. The 5% reduction in economic growth has been attributed to reduced trade, weaker business investment, and labor shortages due to lower immigration from the EU.
Goldman Sachs highlights three major factors contributing to the economic shortfall. First, reduced trade has played its expected role in the decline. Second, business investment has fallen notably short of pre-referendum levels. Lastly, changes in immigration patterns have resulted in a less economically active cohort of non-EU migrants, primarily students, replacing EU migrants.
Despite the challenges, the British government remains optimistic about leveraging Brexit freedoms to boost the economy. They aim to repeal EU financial services law, potentially unlocking £100 billion ($125 billion) in investment over the next decade. However, the Goldman Sachs analysis suggests that the impact of this strategy might be limited.
Since the Brexit vote, UK goods trade has underperformed other advanced economies by approximately 15%, while business investment has fallen significantly below pre-referendum levels. The change in immigration flows has reduced labor supply elasticity, resulting in inflationary pressures for the UK economy.
Comparatively, UK real GDP per capita has barely risen above pre-Covid levels, standing at just 4% above mid-2016 levels. In contrast, the euro zone area and the US have experienced growth rates of 8% and 15%, respectively. Moreover, the UK has recorded higher inflation, with consumer prices rising 31% since mid-2016 compared to 27% in the US and 24% in the euro zone.
The report acknowledges the potential mitigating effects of new non-EU trade agreements; however, the benefit is expected to be minimal. Trade deals with Australia and Switzerland, for example, are projected to have limited economic impacts. Additionally, timelines for new trade deals with major partners such as the US and India have not been announced.
Goldman Sachs’ analysis emphasizes the long-term output cost of Brexit and the need for the UK to address the repercussions of reduced trade, diminished investment, and immigration changes. With Brexit continuing to shape the UK’s economic landscape, it remains critical for policymakers to find innovative solutions to ensure sustainable growth.
Sources: Business Today