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Cost of Covid-19 and Brexit to the UK economy now at at least £250bn each, with Brexit expected to cost more long-term: research

What do Brexit and Covid-19 have in common? They’ve each cost the UK at least £250bn so far, new research out this week suggests – adding that long-term, Brexit is set to prove the more expensive.

Parcel delivery comparison website ParcelHero this week analysed Government figures and publicly-available third-party economic assessments and forecasts to arrive at the totals.

ParcelHero head of consumer research David Jinks says: “British businesses have had a torrid few years. The impact of either Covid-19 or Brexit would have been bad enough; together they have proved disastrous. But which has been the heavier burden for them to bear? The shocking answer is that the entirely avoidable Brexit crisis has had as much of an impact on UK businesses as the unforeseeable Covid-19 tragedy, and its costs are still rising.”

ParcelHero’s calculations start with the cost of Covid-19, citing research from the Centre for Economics and Business Research which put the total for Covid-19 lockdowns at £251bn. It found that the value of goods and services produced by the economy was more than £250bn lower than it would have been, as represented by the GVA (gross value added) of the economy – the value of goods and services delivered minus the costs of producing them.

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Within that, business insurer Simply Business found that Covid-19 cost small businesses £126.6bn, and in November 2021, a Government report suggested that the UK government had set aside almost £365bn in announced budgetary measures in its response to Covid .

The Brexit column of the calculation starts with a 2020 Bloomberg Economics report that suggests the economic cost of Brexit would have top £200bn in lost revenues to UK companies, before it even happened, with the British economy by then 3% smaller than it otherwise would have been.

In August 2020, an Institute for Government suggested in August 2020 that the UK government expected to have spent £8.1bn on preparing for Brexit by the end of the transition period, which ended in January 2020. That included £4.4bn that the National Audit Office suggested had already been spent by January 31 2020.

And in November 2021, a report from the UK Trade Policy Observatory suggested that falling trade had cost UK businesses a further £43.5bn – divided between £32.5bn in imports and £11bn in exports.

Jinks says the two sums mean “the combined costs of Brexit and of the pandemic both equal around £250bn. However, in the long term, Brexit could end up costing even more than Covid-19.”

He points to comments by Thomas Sampson, associate professor at the London School of Economics, who predicted in an August 2020 blogpost that, “When measured in terms of their impact on the present value of UK GDP, the Brexit shock is forecast to be two to three times greater than the impact of COVID-19.”

And he cites forecasts from the Office for Budget Responsibility (OBR) last October that suggested leaving the EU would “reduce our long run GDP by around 4%.” That adds to a 2% hit from the pandemic.

The Government Business Insights report of January 13 2022 estimated that 66% of UK businesses experienced challenges with exporting and 79% with importing in December 2021, with 33.7% of transport and logistics companies closing, permanently (2.7%), temporarily (11.8%) or partially (19.3%).

By Chloe Rigby

Source: Internet Retailing

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Brexit and pandemic have cost UK businesses £250bn each but EU departure tally now rising faster than Covid disruption

The political choice of Brexit has cost UK businesses as much as the unforeseeable Covid pandemic.

British companies have lost over £250bn to Covid and an equal amount to Brexit by the end of 2021, but the Brexit tally is now rising faster.

The Centre for Economics and Business Research found that Covid-19 lockdowns had cost UK businesses £251bn by March of last year.

It revealed the value of the goods and services produced by the economy was more than £250bn lower than it would otherwise have been.

It calculated the Gross value added (GVA), which measures the value of the goods and services produced by the economy, minus the costs of inputs and raw materials needed to deliver them.

Covid-19 cost small businesses alone an estimated £126.6bn, according to the business insurer Simply Business, while a November 2021 Government report revealed the UK lost almost £365 billion in GDP from Covid overall.

Commenting on the figures, David Jinks, who is head of consumer research at delivery firm ParcelHero, said: “British businesses have had a torrid few years.”

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“Brexit or Covid, which has been the heavier burden for them to bear? The shocking answer is that the entirely avoidable Brexit crisis has had as much of an impact on UK businesses as the unforeseeable Covid-19 tragedy, and its costs are still rising,” he added.

“No one could have foreseen the arrival of the pandemic and there was little that could have been done to shield UK businesses in advance. However, this is certainly not the case for the impact of Brexit on UK businesses,” Jinks said.

Negotiations

The confrontational handling of trade negotiations with the European Union made “a bad situation worse,” he stated.

Before Brexit had even happened, a 2020 report by Bloomberg Economics revealed that, by the end of that year, the economic cost of Brexit already exceeded £200bn in lost revenues to UK companies. It calculated the British economy was 3 per cent smaller than it otherwise would have been.

Since Brexit actually happened, on 1 January, 2021, the UK Trade Policy Observatory reveals that the reduction in trade has lost UK businesses a further £44bn.

“That breaks down to £32.5bn lost in potential imports to the UK and £11bn in exports to the EU,” Jinks pointed out.

The UK Government splashed a further £8.1bn on preparing for Brexit and the end of the transition period, according to the Institute for Government.

“In our view, that was money that should have been spent on promoting UK trade across the EU and beyond, not battening down the hatches,” noted Jinks.

The figures mean that the combined costs of Brexit and of the pandemic both equal around £250bn.

However, in the long term, Brexit could end up costing even more than Covid-19.

Thomas Sampson, Associate Professor at the London School of Economics, said: “When measured in terms of their impact on the present value of UK GDP, the Brexit shock is forecast to be two to three times greater than the impact of Covid-19.

Moreover, the Office for Budget Responsibility (OBR) told the BBC last October that leaving the EU would “reduce our long run GDP by around 4 per cent.”

It is believed the effect of the pandemic will reduce GDP output by only a further 2 per cent.

End of Covid restrictions

With the end of lockdown and travel restrictions, the impact of Covid measures is now receding but the Brexit bill continues to mount.

The most recent Government Business Insights report has revealed that, last month, 66 per cent of UK businesses experienced challenges with exporting and 79 per cent with importing.

“This has had a knock-on effect on transport and logistics companies. A staggering 36.7 per cent of transport and logistics companies either closed, paused trading entirely or continued trading only partially in December,” Jinks shared.

This is only how much the loss of physical goods sales has cost.

The Institute for Fiscal Studies sayidexports of professional services to the EU slumped from 44 per cent of the UK’s entire international services trade in 2016, before Brexit negotiations got underway, to just 30 per cent in 2021. It forecast a net drop in overall UK services exports.

By MICHIEL WILLEMS

Source: City AM

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Challenges mounting for the UK economy

Despite a successful vaccination programme and a post-lockdown boom, what challenges await the UK economy in 2022?

The UK’s successful vaccination programme and subsequent re-opening boost led us to hold an overweight in UK equities for much of the year. But challenges are now mounting for the UK economy and we moved to an underweight position in mid-September, reflecting the more cautious approach to risk in the portfolio as a whole.

Things were looking good for the UK economy in the Spring of 2021. The UK underwent one of the strongest vaccine-led recoveries in developed markets. Services PMIs moved comfortably into expansion territory as economic activity came back online in many sectors that had been effectively shut down because of lockdown restrictions. In addition, UK equities were trading at a discount to the richer valuations in other developed markets, largely due worries about the ongoing impact of Brexit. As the year progressed, the preference towards the UK proved rewarding as UK equities gained strongly over the YTD period.

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A year of two halves

However, that re-opening boost is now firmly in the past and the UK economy now faces several challenges that have led us to reduce our exposure. First, inflation is becoming a major headache for the Bank of England. The current bout of price rises is in part due to pandemic-related bottlenecks. However, unlike the Federal Reserve and the ECB, the Bank of England still views its 2% inflation target as an upper limit rather than an average, and therefore feels duty-bound to act sooner to curb inflation. The recent guidance from the Bank of England has directed markets to expect a rate hike soon. However, we feel this would likely be a mistake given the weakness now showing in the UK’s economic growth.

Second, Covid-19 cases are once again rising in the UK, with hospitalisations and deaths now at their highest levels since March. Even though the government may not act to re-introduce official restrictions, people may choose to avoid activities with a higher likelihood of transmission anyway if they feel unsafe. Recent news of another virus mutation potentially more transmissible than the Delta variant only serves to underscore how fast the narrative could change for the worse.

Third, September marked the end of the furlough scheme that subsidised the wages of workers that would have been laid off due to the pandemic. Data on the impact that this will have on the jobs market is still coming in, but the transition adds additional uncertainty to the labour market. The effects of Covid-19 coupled with Brexit has led to a well-publicised acute shortage of workers in a number of roles, such as HGV drivers.

Hospitality too has experienced a shortage of workers, while at the same time trying to meet the increased demand associated with the economic re-opening. This is something I can attest to anecdotally, having recently been out marketing around the UK. A recurring theme in the hotels and restaurants I have visited is one of not enough staff to fill vacancies resulting in not all facilities being available. These staff shortages are having a knock-on effect on business and growth.

Lastly, the recent surge in energy prices in the UK is a serious concern. The UK use a relatively large proportion of natural gas to generate its electricity, and is more exposed to the extreme price moves. While the most obvious impact is higher inflation, we believe that markets are underestimating the potential hit to growth in both the UK and Europe, particularly if the winter is colder than usual and gas supply constraints do not improve.

What now?

As a result of the worsening outlook for the UK, we have lowered the exposure to the UK in the Open range. This mirrors our more cautious view of risk in general, having also moved to underweight equities overall. Global growth is slowing, inflation is a concern in many developed markets, and the fallout from China’s shift in direction of policy could yet spread to other markets. We have increased our cash position, especially in light of the inflation concerns weighing over government bonds, and have increased holdings of defensive equities such as utilities to add protection in the event of a market correction.

By Chris Forgan

Source: Money Marketing

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Impact of Brexit on economy ‘worse than Covid’

The impact of Brexit on the UK economy will be worse in the long run compared to the coronavirus pandemic, the chairman of the Office for Budget Responsibility has said.

Richard Hughes said leaving the EU would reduce the UK’s potential GDP by about 4% in the long term.

He said forecasts showed the pandemic would reduce GDP “by a further 2%”.

“In the long term it is the case that Brexit has a bigger impact than the pandemic”, he told the BBC.

His comments come after the OBR said the cost of living could rise at its fastest rate for 30 years, with suggestions inflation could hit almost 5%.

Speaking after Wednesday’s Budget, Mr Hughes said recent data showed the impact of Brexit was “broadly consistent” with the OBR’s assumption that the leaving the EU would “reduce our long run GDP by around 4%”.

“We think that the effect of the pandemic will reduce that (GDP) output by a further 2%,” he added.

The Treasury has been contacted for comment.

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What is GDP and how is it measured?
GDP or Gross Domestic Product is one of the most important ways of showing how well, or badly, an economy is doing. It is a measure – or an attempt to measure – all the activity of companies, governments and individuals in an economy.

In a growing economy, quarterly GDP will be slightly higher than the quarter before, a sign that people are doing more work and getting (on average) a little bit richer. If GDP is falling, then the economy is shrinking.

The UK voted to leave the EU in 2016 and officially left the trading bloc on 31 January 2020, however, both sides agreed to keep many things the same until 31 December 2020, before a new trade deal was announced and implemented on 1 January this year.

Supply chain problems
Both the pandemic and Brexit have played a part in current supply chain issues across the UK, and have further exposed the scarcity of lorry drivers, which has resulted in recent shortages of products for businesses and some empty shelves for customers.

However, in the OBR’s latest report, the independent body said “supply bottlenecks had been exacerbated by changes in the migration and trading regimes following Brexit”.

Supply chain issues has led to the government granting short-term visas to EU workers across certain sectors, including the haulage industry.

The British Poultry Council has said turkey farmers will do their best to ensure Christmas “is as normal as it can be”, but warned shortages are likely, due to a shortage of seasonal overseas workers.

The government has assured consumers that turkeys will be available for the festive season and has also deployed temporary visas in a bid to bolster worker numbers.

Source: BBC

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Brexit is harming the UK economy, say 44% of voters

Almost twice as many voters now believe Brexit is having a negative effect on the UK economy as think it is benefiting the nation’s finances, according to the latest Opinium poll for the Observer, carried out during budget week.

The survey comes after Richard Hughes, the chairman of the Office for Budget Responsibility, said his organisation calculated that the negative impact on GDP caused by the UK’s exit from the EU was expected to be twice as great as that resulting from the pandemic.

Hughes said Brexit would reduce the UK’s potential GDP by about 4% in the long term, while the pandemic would cut it “by a further 2%”. “In the long term, it is the case that Brexit has a bigger impact than the pandemic,” he said.

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Opinium’s findings appear to be in line with other recent polling, including a survey last week by Ipsos MORI, which showed concern about the effects of Brexit rising to the point that it is now seen as the biggest issue for the country alongside Covid-19.

The Opinium survey found that 44% of people think Brexit is having a bad impact on the UK economy, compared with 25% who think it is having a positive effect.

More starkly, 53% of people believe Brexit is having a bad effect on prices in shops, against 13% who think it is having a good effect, while 51% think it is adversely affecting the UK’s ability to import goods from the EU, against 15% who think it is helping.

While chancellor Rishi Sunak’s approval rating rose slightly after his Budget speech on Wednesday, in which he increased government spending to its highest sustained level since the 1970s while warning that inflation would rise to 4% next year, the fact that people appear to be linking Brexit with economic problems including rising prices will be a worry to No 10 and No 11 Downing Street.

During the campaign for Brexit, led by Boris Johnson and Michael Gove, voters were told by the Leave campaign that leaving the EU would create a more dynamic UK economy able to trade freely across the globe, and less bureaucracy, leading to lower prices.

The OBR report, published alongside Sunak’s budget, said that its evidence to date suggested its previous forecasts that Brexit would lead to a 15% fall in both UK imports from, and exports to, the EU appeared to have been broadly accurate.

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The report said: “The evidence so far suggests that both import and export intensity have been reduced by Brexit, with developments still consistent with our initial assumption of a 15% reduction in each.”

It is also made clear that shortages of lorry drivers were at least partly caused by Brexit.

Last week the Financial Times reported that whereas by August this year global goods trade had rebounded sharply since the height of the pandemic (according to the CPB World Trade Monitor), the UK was proving a notable exception, with its exports still sharply down.

Since the end of the Brexit transition period on 1 January this year, UK ministers have insisted that difficulties with trade to and from the EU would be short-lived and amounted merely to “teething problems” that would be resolved quickly once companies got used to the new arrangements.

While Opinium found evidence of clear anxiety about Brexit, this has yet to translate into a negative effect on support for the Tory party.

The Conservatives are on 40%, down 1 point compared with a fortnight ago, while Labour is down 2 points on 35%. The Lib Dems are on 8%, the Green party 7%, the SNP 5% and Plaid Cymru 1%.

By Toby Helm

Source: The Guardian

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UK Economy Has Endured A Torrid Start To 2021, Hit By A New COVID-19 Lockdown

UK economy has endured a torrid start to 2021, hit by a new COVID-19 lockdown and disruption caused by the country’s less open trade relationship with the European Union.

While better days are ahead, Bank of England officials meeting ahead of Thursday’s monetary policy announcement must weigh up the likely strength of the recovery, the lasting damage caused by the pandemic, and how much inflation might result.

Here are a selection of indicators that chart the progress of Britain’s economy so far this year:

BIG PICTURE: GDP, EMPLOYMENT STILL FAR BELOW NORMAL

The latest official data showed UK economy contracted in January, although not by as much as feared by some economists. Output remained 9% below its level in February 2020.

Tax office estimates of the number of employees on payrolls showed tentative signs of recovery in January. But they remain more than 700,000 below the pre-pandemic norm.

BoE Governor Andrew Bailey said on Monday he thought economic output would recover to its late-2019 level by around the end of 2021, helped by Britain’s speedy roll-out of COVID-19 vaccines.

IS THE INFLATION TIGER PROWLING?

BoE Chief Economist Andy Haldane last month described the threat of inflation as a tiger that was beginning to stir. Most of his Monetary Policy Committee colleagues sound less worried.

Gauges of price pressure in Britain paint a mixed picture.

The BoE’s rate-setters will find no cause for alarm in the latest surveys of inflation expectations among the British public, which have shown little change of late.

But companies are increasingly reporting increased cost pressures, especially among manufacturers and construction companies that are struggling with supply chain problems, according to the latest IHS Markit/CIPS surveys.

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TRADE TROUBLE

Trade between the United Kingdom and the European Union was hammered in the first month of their new post-Brexit relationship, with record falls in goods shipments in both directions as COVID-19 restrictions continued on both sides.

British goods exports to the EU, excluding non-monetary gold and other precious metals, slumped by 40.7% in January compared to December, the Office for National Statistics said on Friday. Imports fell by 28.8% – another record.

The ONS said the COVID-19 pandemic, which put Britain back under lockdown measures in January, made it hard to quantify the Brexit impact from new customs arrangements, and there were changes in the way data was collected.

But there were also signs of a Brexit hit.

GILT YIELDS ON THE RISE

British government borrowing costs – measured by the yield on the benchmark 10-year gilt – have increased by more than 50 basis points over the last three months, the biggest increase in over four years.

The rise reflects the better prospects for UK economy as the country races ahead with its coronavirus vaccination campaign and a jump in U.S. Treasury bond yields on the back of U.S. President Joe Biden’s $1.9 trillion stimulus plan.

Finance minister Rishi Sunak says Britain’s stock of government debt is increasingly sensitive to rising interest rates. Some economists think that would only be a problem if borrowing costs went up without an economic recovery that would boost tax revenues for the government.

Despite the recent rise, borrowing costs are at historically low levels, with the 10-year gilt yielding 0.833% on Wednesday – similar to rates seen in late 2019 and way down from more than 5% shortly before the 2008-09 global financial crisis.

Reporting by Andy Bruce

Source: Reuters

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Don’t expect sharp post-Covid rebound for UK economy, warn Niesr economists

The UK economy will grow by little more than three per centin 2021 after a 10 per cent slump last year, with a double-whammy from Covid and Brexit likely to be felt for years.

Leading economists at the National Institute of Economic and Social Research (Niesr) are also pushing chancellor Rishi Sunak to raid the coffers once more for extra emergency support.

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Niesr slashed its growth forecast for 2021 to 3.4 per cent from a previous estimate of 5.9 per cent, after taking into account the UK’s third lockdown and Covid-19 wave.

It’ll be 2023 before the UK economy returned to pre-Covid levels, it said.

Last week, the Bank of England said it expected that to happen in the first quarter of next year.

“Despite the roll-out of vaccines, Covid-19 will have long-lasting economic effects,” Niesr’s deputy director Hande Kucuk said today.

By 2025, the UK’s economy was likely to be about six per cent smaller than expected before the pandemic, reflecting higher unemployment, weaker business investment and Britain’s more restricted trading relationship with the European Union.

Sunak – who has promised to spend £280bn on the UK Covid-19 response this financial year, taking the budget deficit to a peacetime high – is due to announce his plans for the next 12 months in a budget statement on 3 March.

By Josh Martin

Source: City AM

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How Brexit is already taking its toll on the U.K. economy

Prime Minister Boris Johnson recently qualified as ‘teething problems’ the many incidents and trade disruptions triggered by the start of Brexit.

With disruptions at European borders and supply chains perturbed by new tariffs, the U.K. economy has begun to show the negative economic impact of leaving Europe’s single market and customs union at the beginning of the year, several indicators show.

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  • Gita Gopinath, the chief economist of the International Monetary Fund, said this week as she was presenting the organization’s new economic forecast, that Brexit would shrink the U.K. economy “by about 1%” this quarter.
  • It was the only economy whose performance in 2020 was downgraded by the IMF, which estimates the country’s gross domestic product fell 10% last year.
  • Surveys by data company IHS Markit show that U.K. manufacturers and service providers are reporting the most severe disruptions of their supply chains, which is “almost exclusively linked to both Brexit disruption and a severe lack of international shipping availability.”
  • Freight volumes between the U.K. and the rest of Europe were down 38% in the third week of January compared with last year.
  • Paperwork, higher costs and compliance delays are severely affecting the traffic of goods on the U.K.-European Union routes, but they have an even more severe impact on trade between Britain and Northern Ireland, which remains in the single market.
  • The Office for Budget Responsibility, the official fiscal watchdog, predicted back in November that Brexit would shrink the U.K. economy by 4% in the long run with a free trade agreement such as the one that was signed between the two sides just before Christmas.

The outlook: Prime Minister Boris Johnson recently qualified as “teething problems” the many incidents and trade disruptions triggered by the start of Brexit. But from British fishermen to City of London finance professionals, many rather expect the government to act to try soften the blow.

The massive economic hit triggered by the COVID-19 pandemic may help hide the detrimental Brexit impact to the general population in the first half of the year. But it is hard to see how the government will be able to mitigate the consequences of being an outsider to the single market without taking steps back toward the EU and opening further discussions.

By Pierre Briançon

Source: Market Watch

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Sterling weakens against euro as post-Brexit deal rally falters

The pound weakened versus the euro on Britain’s first day of trading outside the European Union, but strengthened against a softer dollar, climbing above $1.37 for the first time since May 2018, as traders weighed up Brexit relief with COVID-19 risks.

The pound had strengthened after a last-minute Brexit deal was agreed on Dec. 24, which set rules for industries such as fishing and agriculture.

Although the deal does not cover Britain’s finance sector, UK market participants were relieved by an extension which allows them to use platforms in the European Union for swaps trading until March 2021 – a move announced on Thursday in a bid to avoid disruption.

At 0840 GMT on Monday, the pound changed hands at 89.77 pence per euro, down around 0.5% on the day.

Versus the weaker dollar, the pound was up 0.2% at $1.3682, having briefly crossed the $1.37 level for the first time since May 2018 early in the European session. The pound gained 2.5% overall against the dollar in December.

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Commerzbank’s head of FX and commodity research, Ulrich Leuchtmann, said that sterling’s recovery after the Brexit deal was agreed was “disappointingly limited”, but that it has further scope for gains in the next few days as traders adjust their positioning upon their return from holiday.

Leuchtmann was less bullish on sterling’s longer-term outlook, however.

“For market participants with a long-term outlook the concern that Brexit might constitute the beginning of renewed economic decline in the UK is more likely to dominate,” he said.

Sterling-dollar implied volatility gauges with one-month and three-month maturities, which spiked in December and then fell when the Brexit deal was agreed, have edged up again in the past few days, suggesting traders still expect price swings.

In bad news for sterling, COVID-19 cases in Britain are at record levels. Prime Minister Boris Johnson said on Sunday that tougher lockdown restrictions were probably on the way.

RBC Capital Markets analysts wrote in a note to clients that negative interest rates are likely to remain a possibility for the UK because, although a chaotic no-deal Brexit has been avoided, rising COVID-19 infections will have an impact on the Bank of England’s outlook for the economy.

Market participants are pricing in negative rates in the UK by May 2021.

Reporting by Elizabeth Howcroft

Source: UK Reuters

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UK economy shrank by close to 11% in 2020, says Deutsche Bank

The UK economy likely shrank by close to 11% in 2020, according to Deutsche Bank, marking the worst annual contraction in three centuries.

The bank said growth prospects for 2021 on the other hand remained positive on the whole.

“While tighter restrictions and some Brexit disruption will likely further disrupt the UK’s recovery in the first quarter of 2021, an earlier-than-expected rollout of vaccines should support the UK’s journey toward normalcy next year,” it said.

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DB said that while it’s early days, it expects the recovery to firmly begin from the second quarter of this year.

“We see growth coming in closer to 5% next year,” it said, adding that risks to its forecasts are firmly tilted to the upside.

By Michele Maatouk

Source: Sharecast

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