- New research finds COVID-19 will exacerbate the impact of a No-Deal Brexit, deepening the impact on UK GDP by 50%
- The impact of COVID-19 alone will cost around £50 billion a year in lost GDP
- A No Deal Brexit would cost the UK an additional £84 billion a year in lost GDP
- The forecast total of £134 billion in lost GDP each year is more than NHS England's entire budget in 2018/19
- Long term loss in export revenues for four key manufacturing sectors alone will amount to £28 billion a year
- UK productivity to fall by 1.1% totalling a loss of £24 billion
- Companies urged to actively engage with the UK government to ensure that it delivers on its commitments to boost UK growth and competitiveness in both deal and no-deal scenarios
A No-Deal Brexit compounded by the COVID-19 pandemic could see UK GDP fall by 6% and lose £134 billion pounds annually, according to our new report.
The Future of UK Trade: Merged Realities of Brexit and COVID-19, developed by leading legal global law firm Baker McKenzie and economic consultancy Oxford Economics, covers four sectors of the UK economy, automotive, consumer goods, healthcare and technology which make up around 40% of the UK’s manufacturing GDP and export 46% of their goods to the EU.
The report forecasts the combined economic costs of Brexit and the COVID-19 crisis on the UK economy as well as addressing particular issues relating to exports of four key industries: automotive; consumer goods; healthcare; and technology.
It also explores potential policy options for mitigating the resulting damage to business activity, including two specific Free Trade Agreements (FTAs); a trade deal with the US and membership of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) . Estimates based on data from Oxford Economics suggest that a US-UK deal would provide a boost of only around 0.2% to the UK’s GDP, while membership of the CPTPP would raise GDP by a marginal 0.05%.
The long-term economic impact of COVID-19
The report forecasts that over the next decade the UK's GDP will be 2% lower, the equivalent of £50 billion a year, because of the pandemic, when benchmarked to the level of GDP in 2019.
With the UK economy now gradually re-opening, many firms will remain operating well below normal capacity, limiting the pace of the recovery.
The report forecasts that in the long-term, the UK’s total exports will be about 2.5% below the levels anticipated before the outbreak.
Jenny Revis, partner in the EU, Competition and Trade practice at Baker McKenzie said, "It seems extraordinary that in the midst of the biggest economic shock to the global economy since the Second World War that the British government would consider compounding the impact on the economy of COVID-19 through consciously choosing a No Deal Brexit. This would add enormous burdens to business at a time they are already facing genuinely unprecedented challenges. An 11th hour deal is still possible and would be in everyone's interests - businesses in the most affected sectors should make a final lobbying push now to UK ministers while also finalising their no-deal planning."
The long term economic impact of Brexit
The report outlines that a free trade deal with the EU would see UK GDP fall by 3.1% in the next decade relative to a hypothetical scenario where the UK remained in the EU equating to an additional loss in GDP of £67 billion. In the long-term, we estimate a 6.3% loss in annual exports from Brexit with a future trade deal equating to an additional annual reduction in revenues of £23bn when benchmarked to 2019 levels.
With a No-Deal Brexit, the report estimates that such an outcome would reduce the UK’s GDP by significantly more - by 3.9% over the same period equating to an additional annual loss in GDP of £84bn when benchmarked to 2019 levels. .
Additionally, a No-Deal outcome would therefore have more serious consequences for the UK’s exports of goods, which is estimated would be reduced by around 11% in the long run (compared to 6.3% with an EU FTA).
Sunny Mann co-lead of Compliance and Investigations & International Commercial and Trade, London at Baker McKenzie said: “In a No-Deal scenario, businesses will face additional costs from trade tariffs and other non-tariff barriers. Rising costs, coupled with reduced labour, will amplify output loss, which will further depress export revenues. A negative investment outlook will also put a strain on businesses seeking recovery in the post-COVID-19 landscape, especially those who need liquidity or to divest assets.”
The outlook for UK Trade/Industry
The report forecasts a significant loss in export revenue across the automotive, consumer goods, healthcare and technology sectors modelled. These losses equate to a reduction of £2.7 billion per annum in export revenues when benchmarked against the level of trade in 2019.
The technology (3.2% drop worth £0.9 billion) and automotive industries (2.4% drop worth £1.0 billion) are expected to suffer the sharpest medium-term declines in export revenues, in both percentage and monetary terms. Least affected in percentage terms is the consumer industry, reflecting shorter and less complex supply chains in the apparel and agro-food sectors.
Brexit impact varies significantly across manufacturing sectors
Even as businesses to take steps to offset the added costs of Brexit by reconfiguring supply chains, the decline in export revenues for UK manufacturers will be substantial. However, the vulnerability of individual industries varies significantly, depending on the share of trade with the EU, level of trade barriers resulting from alternative Brexit outcomes, and trade-cost elasticity.
The report outlines that the combined impacts of the pandemic and a No-Deal Brexit outcome equate to a reduction of over £28 billion per annum in export revenues across the four named sectors, when benchmarked against the level of trade in 2019.
If the UK signs an EU deal, the healthcare sector will see a greater impact than automotive. This is due to the reflective of relatively high non-tariff barriers in the pharmaceutical industry. However, the impact of a No-Deal outcome is higher for autos, as it would likely disrupt the operation of the industry’s cross-border ‘just-in-time’ production systems and make Britain a significantly less competitive place to assemble cars.
Jannan Crozier, Industrials, Manufacturing & Transportation lead for EMEA and Corporate Partner, Baker McKenzie, suggests that, “A No-Deal Brexit would be a severe blow to the UK auto industry. With the UK’s high export of vehicles to the EU, simply put, higher tariffs would result in higher costs leading to a drop in demand, lower outputs and loss of jobs.”
With or without a Brexit deal, the consumer sector is projected to experience the largest declines in export revenues, both in percentage and monetary terms. Large losses of over £10 billion reflect the fact that the EU agricultural sector is highly regulated by non-tariff barriers (even with an EU deal). Both food and apparel sub-sectors would be subject to relatively high Most-Favoured Nation (MFN) tariffs in the event of a No-Deal outcome.
Julia Hemmings, who is based in London and is an IT/Commercial Partner and co-head of the Consumer and Commercial Advisory practice, suggests that, “In the event of a No-Deal Brexit, the impact on consumers will be heightened with increased retail costs and reduced availability as consumer goods are subjected to extensive border checks and supply chain disruption. With the lion’s share of UK food imports originating from the EU, the impact on the grocery distribution
industry will be amplified.”
Labour constraints will also affect the economy
The UK’s new immigration policy from January 2021 will involve a points-based system and without the benefit of the EU’s Freedom of Movement rules, EU nationals will be subject to the same immigration protocols as citizens of other countries.
This means the UK’s working age population will grow more slowly than it would have had freedom of movement been maintained and growth in the size of its labour force will also be weaker. The UK’s change of approach to migration will therefore have important implications for the UK economy’s future productive capacity. A weakened labour force alone will result in an estimated 1.1% loss of output for the UK economy over the next decade, valued at £24 billion.
Stephen Ratcliffe, partner in the Employment and Benefits practice at Baker McKenzie said, “The announcement of the UK’s new immigration policy confirms what most employers were expecting: that the labour pool will shrink post-Brexit, in some sectors materially so. Employers need to act now to assess how their workforce model will need to change from January 2021. Homeworking is not a panacea.”
Mitigating the damage of COVID-19 and Brexit
In a No-Deal scenario, UK's “Global Britain” policy will be dependent on how far it is able to enter into new trade agreements with non-EU countries. There remain significant challenges to simply replicating existing EU deals with non-EU countries. The UK is currently a party to over 40 FTAs that the EU has signed, but unless it can reproduce these agreements, they will expire at the same time as the UK’s transition period ends.
Beyond "replicating" existing EU agreements, the UK has identified negotiation of a new trade deal with the US as a priority, as well as considering membership of the CPTPP. Together, the US and CPTPP member countries account for close to a quarter of the UK’s exports of goods.
What remains clear is that the potential economic benefits from these deals are likely to be relatively modest, especially when compared to the potential losses resulting from Brexit. Estimates based on data from Oxford Economics suggest that a US-UK deal would provide a boost of only around 0.2% to the UK’s GDP, while membership of the CPTPP would raise GDP by a marginal 0.05%.
Jenny Revis, partner in the EU, Competition and Trade practice at Baker McKenzie concluded, “In addition to working on their own Brexit-readiness plans, companies must actively engage with the UK government to ensure that it delivers on its commitments to boost UK growth and competitiveness, such as promptly negotiating and concluding FTAs with key trading partners. This is absolutely crucial to mitigate the dual impact of COVID-19 and Brexit and to accelerate the UK economic recovery.”