Brexit uncertainty shrinks UK economy and costs country £360m per week

British economic growth has faltered since the vote to leave the EU in 2016

British Prime Minister Theresa May. EU withdrawal agreement was defeated for a third time on Friday. EPA

The UK economy is 2.5 per cent smaller than it would have been had the country voted to remain in the European Union, with a knock-on effect to public finances of £360 million (Dh1.7 billion) a week, according to the Centre for European Reform.

The cost exceeds the false assertion by the "leave" campaign in the run-up to the Brexit referendum in 2016 that being a member of the EU costs the country £350m a week to support the National Health Service – the government agency providing healthcare services in the UK.

Instead, the annual fiscal cost of Brexit is £19 billion, just below 1 per cent of the UK’s gross domestic product and a little less than the annual government spending on transport in England, according to the CER survey.

“Britain risks a similar fate to Italy: a comparatively prosperous country in the 1980s, but one that suffered relative economic decline as political gridlock rendered it unreformable,” the think tank said.

On Friday, Prime Minister Theresa May’s withdrawal agreement was rejected by parliament for the third time by 58 votes. Following which, she said, the UK would need to find “an alternative way forward”.

The government has failed to win over 34 Conservative opponents, including both Remainers and Brexiteers, who argue the deal leaves the UK too closely aligned to Europe. Mrs May and her cabinet are still looking for ways to bring her EU withdrawal agreement back to the House of Commons for a fourth attempt.

The CER study found that the country's growth since the Brexit vote has underperformed that of a “doppelganger UK” it studied – a group of countries whose economic characteristics match those of Britain (principally the US, Germany and Luxembourg) – but which did not hold a referendum.

The think tank analysed data relating to quarterly real GDP and other economic indicators including inflation and the size of different industry sectors, over the period since first quarter of 2009, it said.

The study found the economic growth trajectory of the doppelganger  closely matched that of Britain until the referendum, but then the two series diverged.

The cost of Brexit is the difference between the doppelganger’s growth and the UK’s actual growth data, the report said. The £19bn annual cost to the public purse is based on the UK Treasury’s own estimate that 1 per cent of foregone GDP results in  £7.6bn of extra borrowing annually.

“Brexit uncertainty has been bad for the economy,” the think tank said. “This seems like a truism, but in the immediate aftermath of the referendum, growth continued at a decent clip as consumers ran down their savings. Now, consumption has slowed."

Foreign direct investment in the UK "has slumped and corporate investment fell for a four consecutive quarter from January 2018. People are delaying major spending decisions until the outcome of Brexit is clearer.”

The UK missed on the global mini-boom of 2017 and 2018, the report added, with nearly all advanced economies, except Britain, experiencing more rapid growth than in the previous years after the global financial crisis.

Uncertainty will continue to weigh on the economy, but a softer Brexit, with Britain remaining in the customs union and preferably the single market – or a decision to remain in the EU altogether – would mean some of that investment may come back, and increase growth.

In the short term, however, Brexit puts a “speed limit” on the economy, and slow-growing economies tend to be more politically fractious, the report said.