The COVID-19 pandemic and Brexit: A double challenge for the UK economy
The United Kingdom has faced two major shocks in the past few years: the decision to leave the European Union (EU) in 2016 and the outbreak of the COVID-19 pandemic in 2020. Both events have had significant implications for the UK economy and its prospects for growth and recovery. In this blog post, we will examine how these two factors have affected various aspects of the UK economy, such as unemployment, GDP, earnings, and trade, and what challenges and opportunities lie ahead.
Unemployment
The UK unemployment rate has been relatively low in recent years, reaching a record low of 3.8% in early 2020. However, the COVID-19 pandemic has caused a sharp rise in unemployment, reaching 5.2% in November 2020, the highest level since 2016. The impact of the pandemic has been uneven across sectors, with some industries such as hospitality, tourism, and arts and entertainment experiencing a larger decline in employment than others. The government’s furlough scheme, which has supported millions of workers during the lockdowns, has helped to mitigate the rise in unemployment, but it is expected to end in April 2021, which could lead to further job losses.
The impact of Brexit on unemployment is less clear, as it depends on the nature and extent of the trade deal between the UK and the EU, which is still being negotiated. Some studies have suggested that Brexit could reduce employment by up to 1.5 million jobs in the long run, depending on the degree of trade barriers and regulatory divergence between the UK and the EU. However, other studies have argued that Brexit could create new opportunities for employment in sectors such as agriculture, fisheries, and manufacturing. The effect of Brexit on unemployment will also vary across regions and nations within the UK, with some areas such as London, Wales, and Northern Ireland being more exposed to Brexit-related risks than others.
GDP
The UK GDP has suffered a severe contraction due to the COVID-19 pandemic, falling by 20.4% in the second quarter of 2020, the largest decline among comparable countries. The GDP recovered partially in the third quarter of 2020, growing by 16%, but it was still 9.7% below its pre-pandemic level. The resurgence of the virus and the imposition of new lockdown measures in late 2020 and early 2021 have dampened the prospects for a swift recovery. The Office for Budget Responsibility (OBR) has projected that the UK GDP will shrink by 11.3% in 2020 and grow by 5.5% in 2021.
The impact of Brexit on GDP is also uncertain, as it depends on the outcome of the trade negotiations and the degree of economic integration between the UK and the EU. The OBR has estimated that leaving the EU with a free trade agreement (FTA) will reduce the UK’s potential GDP by about 4% in the long run, while leaving without a deal will reduce it by about 6%. These estimates are based on assumptions about trade barriers, migration flows, productivity effects, and fiscal impacts. The impact of Brexit on GDP will also differ across sectors and regions within the UK, with some industries such as finance, communications, and chemicals being more exposed to Brexit-related costs than others.
Earnings
The UK earnings per week have shown a gradual increase over time, reaching an average of £544 in October 2020. However, this figure masks significant disparities across sectors, regions, and genders. The COVID-19 pandemic has affected earnings differently across industries, with some sectors such as accommodation, construction, and wholesale trade experiencing a larger drop in earnings than others. The pandemic has also widened the gender pay gap, as women have been more likely to work in low-paid sectors that have been hit hard by the lockdowns or to take on unpaid care work at home.
The impact of Brexit on earnings is also complex, as it depends on several factors such as trade patterns, labour market conditions, The impact of Brexit on earnings is also complex, as it depends on several factors such as trade patterns, labour market conditions, productivity, inflation and exchange rates. In this blog post, we will examine some of the evidence and arguments on how Brexit has affected or will affect the earnings of workers in the UK.
## Trade and competitiveness
One of the main arguments for leaving the EU was that it would allow the UK to strike new trade deals with other countries and become more competitive in the global market. However, this has not been the case so far. According to the latest data from the Office for National Statistics (ONS), the UK’s trade in goods and services with the EU fell by 11.1% in 2021 compared to 2019, while trade with non-EU countries increased by only 1.7%. The UK’s overall trade deficit widened from £29.4 billion in 2019 to £37.5 billion in 2021.
The trade disruption caused by Brexit has also reduced the UK’s productivity, which is a key determinant of earnings. A study by the Centre for European Reform (CER) estimates that Brexit reduced Britain’s GDP by 5.5% by the second quarter of 2022. This implies that the average worker in the UK produces less output per hour than they would have done if the UK had remained in the EU. The CER also calculates that Brexit costs the government £40 billion a year in lost tax revenue, which could have been used to fund public services or invest in infrastructure.
Another aspect of competitiveness is the exchange rate, which affects the purchasing power of workers’ earnings. Since the referendum in 2016, the pound sterling has depreciated by about 15% against the euro and 10% against the US dollar. This makes imports more expensive and reduces the real value of wages. A report by The Resolution Foundation estimates that Brexit will hit workers’ real wages by nearly £500-a-year by 2024.
## Labour market and migration
Another argument for leaving the EU was that it would allow the UK to control its borders and reduce immigration, which was perceived as a threat to jobs and wages for native workers. However, this argument is not supported by empirical evidence. Most studies find that immigration has a small or negligible impact on wages and employment for native workers, and may even have positive effects on productivity, innovation and public finances.
Moreover, since Brexit, the UK has faced labour shortages in several sectors, such as haulage, hospitality, health care and agriculture. This is partly due to Covid-19 restrictions, but also to Brexit-related factors such as new visa rules, increased bureaucracy and uncertainty. The ONS estimates that there were 1.2 million fewer foreign-born workers in the UK in June 2021 than in December 2019. The lack of workers has led to higher costs, lower output and reduced quality of services for consumers and businesses.
Some employers have responded to labour shortages by raising wages or offering incentives to attract workers. This may seem like a benefit for workers, but it is unlikely to be sustainable or widespread. Higher wages may be offset by higher inflation or lower profits, which could lead to lower investment or higher prices. Moreover, wage increases may not be evenly distributed across sectors or regions, creating inequalities and imbalances in the economy.
## Conclusion
In conclusion, Brexit has had a negative impact on earnings for workers in the UK, both directly and indirectly. It has reduced trade, productivity and competitiveness, increased inflation and exchange rate volatility, and created labour market frictions and shortages. These effects may vary depending on the sector, region and skill level of workers, but they are likely to outweigh any potential benefits from new trade deals or lower immigration.
The future impact of Brexit on earnings will depend on how the UK government manages its relationship with the EU and other countries, as well as how it addresses the domestic challenges of Covid-19 recovery, climate change and social cohesion. The UK needs to find a balance between sovereignty and cooperation, between openness and protectionism, and between innovation and regulation.
Works Cited
[1] Office for National Statistics (ONS). “UK trade: November 2021.” 14 Jan. 2022.
[2] Centre for European Reform (CER). “The cost of Brexit to June 2022.” Dec. 2022.
[3] The Resolution Foundation. “Brexit will hit workers’ real wages by nearly £500-a-year.” 20 Oct. 2021.
[4] ITV News. “Brexit costs government £40 billion a year in lost tax revenue.” 20 Dec. 2022.
[5] UK in a changing Europe. “Migration and wages after Covid and Brexit.” 13 Oct. 2021.
[6] BBC News. “What impact has Brexit had on the UK economy?” 31 Jan. 2022.
