The UK government has let it be known that it will finally trigger Article 50 of the Lisbon Treaty on Wednesday by sending a formal letter to the European Union. This will set in motion a two-year countdown for negotiations to secure the UK’s exit from the EU, including any trade deals, discussions about “passporting” with regard to financial services and immigration. If at the end of the two-year period there is no deal, the UK will walk away from the EU.
Since the Brexit referendum last summer, the UK economy has performed well and has not collapsed in the way that many economists had predicted. The Bank of England and the IMF have been forced to admit that their gloomy assessments were wrong and they have subsequently revised up their GDP forecasts.
For one thing, countries in the EU export about £70 billion more to the UK than the UK sells to the EU, making the EU countries’ dependence on the UK just as significant as the other way around. In particular, Germany is exposed to Brexit, having one of its largest trade surpluses with Britain.
One of the main concerns of the “Remain” campaign was that leaving the EU would be likely involve leaving the single market. This is a subject around which there is a lot of misinformation, however. For leaving the single market does not mean that the UK will stop trading with Europe. The top three trading partners with the EU have no special trade agreement with it, for example, including the United States.
So there is nothing unusual about selling to the EU from outside the EU.
That is what most countries in the world do, and yet much of the narrative surrounding trading under WTO rules is conveyed negatively, as if it contains huge risks. The reality, however, is quite different.
The World Trade Organization is merely an organisation that lays down the rules for how most trade in the world is actually conducted. A recent study by a think tank Civitas found that exports from the UK to the EU in the period that the single market existed had grown less quickly than those to non-EU countries. This is not really surprising as growth in non-EU economies has outpaced growth in EU economies over the past few decades.
When it comes to trade in services – an area where the British economy excels and where the greatest growth in world trade in future years is expected to come from – European Commission statistics show that its trade in services is either stagnant or falling.
Within the EU, intra-trade in services between the 28 countries is growing less quickly than external trade in services, that is, between the 28 members and the outside world.
That again indicates that the UK has very little to lose from being outside the single market. It is even debatable whether there is a single market in services at all.
The situation as regards financial services is also more ambiguous than might appear at first sight. UK financial institutions have about 5,500 “passports” at the moment allowing them to conduct business in the EU, while EU companies have more than 8,000 allowing them to do business in Britain.
Clearly an agreement regarding “passporting” will be a priority for the UK given what could be at stake, with accountants PwC estimating that the costs of relocating financial services could have a minus 0.4 per cent impact on the UK’s GDP by 2030.
However, the EU will also have an incentive to reach an agreement over this, and given the UK’s influential role in setting regulatory standards over the years, it should not be too difficult for the UK to negotiate a satisfactory outcome.
While it is impossible to anticipate all the events and circumstances that will affect the EU and UK economies in coming years, it seems that the UK economy should be able to hold up reasonably well outside the EU, with concerns about a Brexit induced slowdown overdone. Inflation pressures are increasing, consumer credit growth is running at its fastest pace since 2005, mortgage approvals are improving and M4 money supply growth is on the up.
The UK has withstood the immediate post-Brexit period well, and it can continue to prosper outside the EU.
Tim Fox is the chief economist and head of research at Emirates NBD
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