I thought I would share this from a JPM report:
What about the economic impact of the Brexit deal over the longer run? There are several pieces to this, but one of the most conspicuous is how regulatory change will impact the UK’s ability to export to the EU. In prior work, we examined how a full shift to non-EU status would impact the UK services sector. More specifically, we looked at how changes in the World Bank’s measures of services trade restrictiveness are reflected in the cross-country pattern of UK services exports. We concluded that a full reversion to non-EU status would tend to lower UK services exports to the EU by 29%, with a 10% reduction of non-EU exports owing to complementarity effects (for example when a US-based firm purchases services relating to activities in the EU from a UK-based one). Those declines would sum to a 2.3% hit to the level of GDP acting through regulatory change alone. With the Brexit settlement now in hand, we see little reason to moderate that estimate of the impact very much.
The absence of deep services provisions in the agreement does not come as a surprise to us. But compared to our expectations a year or so ago, the UK has also secured less regulatory recognition from the EU than we had anticipated in the goods sector. The absence of anything close to “equivalence” for respective regulations over goods, and of mutual recognition of conformity assessment bodies, provides levers for the EU to encourage manufacturers serving EU markets to base themselves in the EU rather than in the UK. While these changes may be more subtle and slower-acting than in the services sector, we find it easy to imagine them accounting for a hit in excess of 1% of GDP over time, even given the UK manufacturing sector’s already diminished size.
Work by ourselves and others has already identified a significant hit to UK GDP while the uncertainty over the UK’s relationship with the EU has persisted, acting primarily through weakness in business investment. The OBR, for example, has suggested a 2% hit from this source to date. The deal significantly increases the uncertainty over the UK’s relationship with the EU. While that may allow some investment that had been postponed to resume, we doubt that the nature of the settlement will boost business investment overall.
Taking the near-2% hit to UK activity via regulatory change in the services sector, 1% hit in the goods sector from the same source, and 2% hit via depressed business investment to date sums to a near-5% hit from these sources alone. In addition to these, we also need to consider how Brexit may impact forces such as future migration flows and productivity growth. In our view, assessments of these impacts are even more speculative than those already discussed. While most expect migration flows from the EU to the UK to be lower as a result of Brexit, there is much uncertainty about magnitudes. The dynamics of the UK’s very weak productivity performance over the last decade or so are not well understood. However, most analyses expect a negative impact from Brexit from this source as the intensity of trade flows (and hence competitive pressure to innovate) is reduced. Ahead of the referendum analyses of the long-run impacts of a “hard” form of Brexit had tended to the 5%-10% of GDP range, and that remains a realistic ballpark, in our view.
EightAteEight 