TEA, QUEUES AND ECONOMIC MUSE:

UNRAVELING THE QUIRKY THREADS OF THE UK ECONOMY

“With a gross domestic product (GDP) of $3.07 trillion in 2022 and a population of more
than 67 million, UK has the sixth-largest economy after the US, China, Japan, Germany and
India.”1

The United Kingdom, a Union of Wit and Wealth, comprises England, Scotland, Wales, and
Northern Ireland. With a stellar quality of life, its economy showcases a delightful mix of
services, manufacturing, construction, and tourism, crafting a diverse tapestry of prosperity.

UK’s GDP TREND

“The UK’s economy grew by 4.3% in 2022, after a growth rate of 8.7% in 2021 and a record
10.4% decline in 2020, due to the economic fallout caused by the COVID-19 pandemic and
Brexit. During the provided time period, the biggest annual fall in GDP prior to 2020
occurred in 2009, when the UK economy contracted by 4.5% at the height of the global
financial crisis of the late 2000s. Between 1949 and 2020, the year with the highest annual
GDP growth rate was 1973, when the UK economy grew by 6.5%.”2

It is evident from the graph that since 2016, the GDP has been constantly falling because of
the referendum announced during that time by then Prime Minister Theresa May for the
disintegration of Britain from the European Union (Brexit).

1
“The Economy of the United Kingdom, INVESTOPEDIA,
https://www.investopedia.com/articles/investing/042915/how-uk-makes-money.asp (last visited Sep 30,
2023).”
2
“UK GDP growth 2022, STATISTA, https://www.statista.com/statistics/281734/gdp-growth-in-the-united-
kingdom-uk/ (last visited Oct 2, 2023).”
“UK’s GDP for 2019 was $2857.06Bn, a 0.73% decline from 2018; at $2704.61Bn in 2020, a
5.34% decline from 2019; at $3122.48Bn in 2021, a 15.45% increase from 2020 and at
$3070.67Bn, a 1.66% decline from 2021.”3

3
“U.K. GDP 1960-2023, https://www.macrotrends.net/countries/GBR/united-kingdom/gdp-gross-domestic-
product (last visited Oct 2, 2023).”
 “THREE YEARS ON, BREXIT CASTS A LONG SHADOW OVER THE
UK ECONOMY”4

1. The impact of Brexit on trade has been substantial, potentially unfolding at a faster
pace than initially anticipated - The exchange of goods between the UK and the EU saw
a notable reduction after the conclusion of the Brexit transition period. UK imports from
the EU witnessed a significant drop, approximately 25% more than imports from other
global regions, and this trend persisted throughout 2021.

2. Following Brexit, the level of trade openness in Britain has shown a more
noticeable decrease in comparison to similar economies. - The GDP has witnessed an
8%-point decline between 2019 and 2021. While the pandemic has negatively impacted
trade for the UK, similar to other economies, the country's decline exceeds that of
comparable nations by at least 3%, indicating that Brexit is a significant contributing
factor.

3. Investment levels post-Brexit have dipped by over 30% compared to the pre-
referendum trend - The decision to depart from the EU has created considerable
uncertainty since the 2016 referendum, undermining confidence in the UK economy and
impeding business investments. Investments are 31% below the pre-referendum trend. In
the EU, by contrast, business investment is currently 2% above its pre-2016 trend.

4. Britain's current economic performance is below both pre and post-2016

referendum forecasts - As per the present assessment, the UK economy seems to be
approximately 5.5% less prosperous than it could have been had it opted to remain in the
EU. Furthermore, if the UK had chosen to stay in the EU, tax revenues would have been
approximately £40 billion higher than the current scenario.

What next for post-Brexit Britain?

In the course of this undertaking, Brexit has exposed and heightened the inherent
shortcomings in the British economy. These include low productivity, reduced business
4
“Three Years On, Brexit Casts a Long Shadow Over the UK Economy,
https://www.institute.global/insights/geopolitics-and-security/three-years-brexit-casts-long-shadow-over-uk-
economy (last visited Oct 3, 2023).”
 investments, diminishing global competitiveness, and notably, a lack of government
strategy to tackle these challenges.

Following the referendum, the UK trade market experienced volatility in contrast to the
stability seen in the EU's market. Subsequently, it entered a period of decline, which has
persisted. Despite a post-Covid economic recovery, the ascent is not as robust as needed to
provide substantial support.

OECD and IMF forecasts

As per the OECD's evaluation, the global growth witnessed in the initial half of 2023
demonstrated unexpected resilience, yet the overall growth prospects remain somewhat
fragile. The OECD projects a 0.3% increase in the UK's GDP for 2023, consistent with its
prior forecast, while anticipating a modest uptick to 0.8% in 2024, slightly revised from the
earlier projection of 0.1%.

The IMF noted a modest improvement in its global forecast for the year, cautioning that the
recovery is tepid compared to historical standards. The IMF anticipates a 0.4% growth in the
UK's GDP for 2023, a positive adjustment from its previous forecast of -0.3%, and envisions
a more robust 1.0% expansion in 2024.

5
Id.
In summary, the IMF's analysis indicates a cautiously positive outlook for the UK's economic
performance, with improvements in the global context. However, the tempered language and
emphasis on historical standards serve as a reminder that challenges persist, and the path to a
robust recovery may still be marked by uncertainties and evolving conditions in the global
economic arena.

UK’s LABOR MARKET TREND

The Brexit referendum and the pandemic contributed to a slowdown in the growth of
employment within the EU, as many EU workers found working in the UK less attractive.
“Prior to 2016 referendum, successive EU enlargements had accelerated the movement of
people between UK and the rest of the EU.” 6 Expectations related to the Brexit referendum in
June 2016 led to a decrease in net migration from the EU, as EU citizens viewed the UK as a
less appealing destination for employment. The agreement brought alterations to the UK
immigration policy, ending the automatic free movement for EU nationals not already
established in the UK. Examining changes in the employment of EU citizens in the UK
shows a noteworthy deceleration in employment growth since the Brexit referendum. There
6
“MigObs-Report-How-is-the-End-of-Free-Movement-Affecting-the-Low-wage-Labour-Force-in-the-UK.pdf,
https://migrationobservatory.ox.ac.uk/wp-content/uploads/2022/08/MigObs-Report-How-is-the-End-of-Free-
Movement-Affecting-the-Low-wage-Labour-Force-in-the-UK.pdf (last visited Oct 5, 2023).”
was a steep decline at the beginning of the pandemic, succeeded by a gradual recovery in EU
employment levels.

Nearly three and a half years post the UK's departure from the EU's single market and
customs union, mounting evidence indicates that Brexit has adversely affected both UK trade
and its labor market. There appears to be a significant decline in trade between the EU and
the UK in both directions due to Brexit. However, there is the prospect of a partial recovery
over time as businesses in the UK and the EU fully adjust to the new environment.

In terms of the labor market, indications suggest that the cessation of free movement
for EU citizens has played a role in the recent surge in labor shortages, particularly in
industries that rely on lower-skilled workers. However, there are also additional factors,
potentially more influential, contributing to the decrease in the UK's labor force participation.

Current Scenario - “In May to July 2023, the labor market continued to loosen: employment
fell and unemployment and inactivity rose. Vacancies fell on the quarter in June to August
2023, as they have every quarter since March to May 2022. Nominal pay growth remained

7
“The impact of Brexit on UK trade and labour markets,
https://www.ecb.europa.eu/pub/economic-bulletin/articles/2023/.”
strong and there was an increase in real pay including bonuses in the three months to July
2023, despite high inflation.”8

KEY FIGURES -
 From May to July 2023, as of the latest data, the workforce landscape in the United
Kingdom reveals that the employment count for individuals aged 16 and above stands
at 32.88 million, yielding an employment rate of 72.5% for those aged 16-64. This
marks a decline from the preceding quarter's 76.0%. Over the past quarter,
employment witnessed a net decrease of 207,000, yet displayed a resilient increase of
135,000 over the last year. Notably, current employment levels remain 103,000 below
pre-pandemic benchmarks recorded in January to March 2020, reflecting the lingering
impact of the ongoing economic adjustments.
 The unemployment rate was 4.3% and 1.46mn people aged 16+ were unemployed.
The unemployment levels rose in the last quarter and the last year and were 89,000
above pre-pandemic levels.
 The number of vacancies fell in the last quarter and over the year to 989,000 in June
to August 2023, but remained 188,000 above pre-pandemic levels.
 The average wages increased with an annual change of 0.6%. The nominal wages are
rising at a rate of 8.5% (including bonuses) and 7.8% (excluding bonuses). Mirroring
the figures from the previous quarter to June 2023, the current data indicates a
consistent trend. Notably, this marks the most substantial year-over-year surge in
nominal pay, excluding bonuses, since the commencement of comparable records in
2001

8
“Andy Powell & Brigid Francis-Devine, UK Labour Market Statistics (2023),
https://commonslibrary.parliament.uk/research-briefings/cbp-9366/ (last visited Sep 30, 2023).”
 IS THE COST OF LIVING HIGH IN UK?

Is the cost of living in the UK playing hide-and-seek with our wallets, or did it just join the
high-price party without sending an invitation? “The cost of living took a steep climb
throughout 2021 and 2022, peaking at 11.1% in October 2022, a level not seen in 41 years.
However, the latest data reveals a minor dip from 6.8% in July to 6.7% in August 2023.
Elevated inflation, like an unwelcome guest, puts a strain on the affordability of goods and
services for households, adding an extra financial juggle to the daily act of balancing
budgets.”9

INFLATION FALLING BUT STILL HIGH - The consumer prices were 6.7% in August
2023 compared to 2022, down from 6.8% and the lowest since February 2022. The

9
“Brigid Francis-Devine et al., Rising Cost of Living in the UK (2023),
https://commonslibrary.parliament.uk/research-briefings/cbp-9428/ (last visited Oct 1, 2023).”
economists forecasted an increasing rate to 7% and the one recorded was lower than what
was expected.
Following the 2016 referendum, inflation has been consistently increasing and reached its
peak in early 2023. But the. forecast is quite optimistic for the rest of 2023.

GLOBAL CAUSES OF HIGH INFLATION -

The genesis of this inflationary uptick can be attributed primarily to global factors,
comprising-
 strong global demand for consumer goods
 related supply chain disruption
 soaring energy and fuel prices - particularly due to Russia’s full-scale invasion of
Ukraine.

While initial inflation surges were propelled by global factors, the escalation of prices within
the domestic economy has taken on its own momentum. This is attributed, in part, to robust
wage growth, as labor costs constitute a significant portion of expenses for numerous firms,
especially within the service sectors,

Commodities, such as oil, are globally traded and valued in US dollars. Consequently, a
depreciation of the pound results in elevated prices for imported commodities when measured
in pounds, and conversely, an appreciation of the pound leads to lower prices in the domestic
currency.
INTEREST RATES AND HOUSING COSTS

In a bid to rein in inflation and align it with the 2% target, the Bank of England has opted to
increase interest rates. Consequently, mortgage rates have experienced a sharp ascent from
the historically low levels observed in the past.

Brexit is causing inflation to rise more sharply in the UK compared to its European
counterparts.

Brexit has significantly added to the widening inflation gap between the UK and its European
counterpart, exacerbating the inflationary effects of a concurrent shared shock

The imposition of fresh tariffs and non-tariff trade barriers by the British government has
eroded purchasing power and restricted access to imports. Consequently, inflation has
emerged in the gradual implementation of the Brexit deal, following the UK's official exit
from the EU in January 2020. The introduction of uncertainty surrounding the UK's
economic policy and investment outlook due to Brexit has weakened the groundwork for
inflation expectations.
 10

UK ECONOMY AFTER REFERENDUM

In this chart, the actual GDP is represented by the red line, while two pre-referendum trend
lines are shown in green and blue. The current disparity ranges from 1.7% to 2.4%,
equivalent to £500-700 per person per year.

10
“Adam S. Posen & Lucas Rengifo-Keller, Brexit Is Driving Inflation Higher in the UK than Its European Peers
after Identical Supply Shocks | PIIE, (2022), https://www.piie.com/research/piie-charts/brexit-driving-inflation-
higher-uk-its-european-peers-after-identical-supply (last visited Oct 5, 2023).”
 11

After the departure, the economy grew by 0.3% in the first quarter of 2017, a decrease from
the 0.7% growth recorded in the last quarter of 2016. Primary setbacks to growth were
observed in consumer-centric sectors like retail trade and accommodation. The deceleration
in these areas was primarily driven by a surge in prices.

ANALYSING UK ECONOMY PRE AND POST BREXIT

ECONOMIC VARIABLE Pre-Brexit (2015-2019 Post-Brexit (2020-2022

average) average)
GDP Growth Rate 1.96% 0.86%
Unemployment Rate 4.42% 4.2%
Inflation Rate 1.53% 4.23%
Trade Balance (deficit) (-) 170,323 Million GBP (-) 127,121 Million GBP
FDI $ 98.026 Billion $50.84 Billion
Consumer Confidence 101.69 pts 93.23 pts

GDP Growth Rate - the mean GDP growth of UK from 2015-2019 has been recorded at
1.96% whereas it has been recorded at 0.86%. Though we should also consider the fact that
in the pre-Brexit period, we’re taking an average of 5 years compared to 3 years in the
post-Brexit period. If we look into the individual data, UK had a significant fall in the GDP

11
“UK Civil Service - The UK’s Economic Performance after the Brexit Referendum,
https://www.civilservant.org.uk/eu-uk_economy_after_brexit_referendum.html (last visited Oct 5, 2023).”
after 2020.

Unemployment Rate - there has not been that significant of a change during both the
periods as the Brexit occurred during the COVID period and that compensated in a sense
for the employment rate of those 5 years (2015-2019) in just 3 years (2020-2022).

Inflation Rate - Brexit has been the primary driver of inflation during the last three and a
half years and has been high ever since. As discussed earlier, even though the rates are in a
downfall, they are still high. Looking at the table, the average rates are at 4.23% as
compared to 1.53% of 2015-2019. And if further expand the data to their individuality, the
rates were as high as 9% in 2022 itself.

Trade Balance - comparing both the trade balances, 2015-2019 is at a deficit of $170,323
million whereas the deficit amount of 3 years is as high as $127,121 million, meaning the
trade deficit of individual years is very high in the term 2020-2022 (3 years) as compared
to 2015-2019 (5 years).

Foreign Direct Investments - Following Brexit, Foreign Direct Investment (FDI) has
experienced a steep decline, reaching an average of $50.84 billion, in stark contrast to the
average during the 2015-2019 period. Subsequent to 2020, the decrease in FDI can be
attributed to both the impact of COVID-19 and a waning interest from countries, partly due
to the diminished influence and standing of the UK in the global order.

Consumer Confidence - In this regard as well, when we delve into the data for individual
years, the consumer confidence for the months spanning from 2015 to 2019 consistently
ranged between 100 and 102 points. In contrast, post-2020, confidence levels have
consistently fallen within the range of 90 to 95 points due to dissatisfaction in terms of
standard of living, rising cost and the public policies.

CONCLUSION
In conclusion, the economic trajectory of the UK pre and post-Brexit reveals a complex and
evolving landscape. While the initial stages of Brexit witnessed some uncertainties and
adjustments, the nation has demonstrated resilience and adaptability in the face of change.

Despite concerns surrounding GDP fluctuations, the UK has shown signs of recovery, with
certain sectors finding new opportunities in the post-Brexit era. The employment era, initially
a point of apprehension, has displayed a rebound, indicating a level of labor market stability.
Inflation, though subject to periodic variations, had generally been manageable, reflecting a
degree of economic steadiness.

Crucially, forecasts by reputable institutions such as IMF and OECD present a positive
outlook for the UK’s economic future. Their projections suggest a gradual but consistent
growth trajectory, underscoring the nation’s capacity to navigate the challenges posed by
Brexit. This optimism is bolstered by strategic policy adjustments and the UK’s ability to
establish new global partnerships.

In essence, the post-Brexit economic landscape of the UK appears to be on a promising

trajectory, with the nation poised for sustained growth and resilience in the face of global
economic dynamics. The challenges posed by Brexit have spurred innovation and adaptation,
positioning the UK for a positive and prosperous future.