The immediate hit of the Brexit referendum on the British economy was bearish and its currency tanked a hard hit against the dollar from 1.35 to 1.14 which is in Forex terms around 2100 pips price fall. A sharp fall in the value of the pound and a decline in business investment was the immediate aftermath of Brexit which was felt all over the country. Still, some experts were pointing that Brexit was a positive move for the UK as the EU was known for its bureaucracy and the UK needed more freedom to control its own economy by taking back control of its laws, borders, and trade policies. Brexit proponents were articulating that the influx of immigrants had high pressure on the public services and made UK salaries shrink. Let’s analyze how well the UK economy is handling itself after Brexit and if the central issues were solved.
What was the immediate effect of Brexit on the GBP?
The 1.50 was the highest price Pound was able to reach in 2016 prior to Brexit. After Brexit the 1.425 became an ATH price for GBPUSD and it was clear that at least in the medium term the UK economy was destined to shrink. ATH meaning in trading can help traders and investors define the range in which price will move and find absolute points at which the biggest battles between bulls and bears are fought. ATH price points of security can suggest the future potential for a price increase. So, how is GBPUSD going, and can it reach the ATH ever again? To answer these questions we will have to analyze the short, medium, and long-term status of the UK economy and see its performance after 3 years of Brexit.
Current status of the UK economy
More than half of the 500 surveyed companies by the British Chambers of Commerce said they were still struggling to adapt to the new system that was imposed after the Brexit referendum. There are strong arguments that the situation would be better if the UK stayed in the EU. The variety of goods also diminished after the system was changed and companies required new paper documents to conduct business in the UK. Academics from the London School of Economics pointed out that the products and food that are imported from the EU have risen in price by about 6% after Brexit.
There are difficulties on the way of defining the exact impact of Brexit on the UK economy in the medium and long term since the pandemic and economic crisis made it difficult to exactly measure the impact of Brexit and pandemics. But there are still some sectors of the economy where the negative effects of Brexit are clear including trade, investments, and jobs.
Investments got by far the biggest hit as investors hate uncertainty
Investments got hit by 29bn Pounds since Brexit as the Bank of London says. This was caused solely by the referendum and is a major hit for the UK economy as it could have been much better if the country stayed in the EU. Businesses don’t like uncertainties, they prefer bad news over uncertainty because if they know what’s coming they can develop mechanisms to prevent negative effects. Since businesses are wary of the future of the UK economy this hit is understandable.
The Cost of Brexit
The UK economy is 5.5% poorer now than it would have been if no referendum had taken place. In the study above the “doppelgänger” method was used to estimate Brexit’s impact on the UK economy. The experts compared the current UK economy with the alternate UK if it was still part of the EU. The results are pretty much self-explanatory as the UK economy got worse and shrank when compared to the alternate UK if it still was a part of the EU. Here are some main points from the study:
- The Brexit hit has led to tax rises because a slower-growing economy requires higher taxation to fund public services and benefits
- Tax revenues would have been 40 bn higher if the UK economy continued growing alongside the EU
- Brexit has reduced investment by 11% and goods trade by 7 %in the second quarter of 2022
- The impact of Covid-19 has affected the results of the study somewhat but still not very substantial
- Although the goods trade shortfall narrowed by 13.6% it is still early to tell whether the UK goods traders have started to shrug off the barriers as many of them are still struggling to adapt to new rules
As we can see, all the studies indicate the same thing, the UK economy is at least 5.5% smaller than it would have been if Brexit never happened. Since the UK is a powerful country in all regards be it economic or military the effects of Brexit are not super impactful on the well-being of the British population.
Conclusion
Three years have passed since Brexit and the UK economy is still grappling with the aftermath of this historic decision. The immediate effects of Brexit were felt by the Pound as its value quickly fell over the cliff and moved a few thousand pips downwards. While Brexit proponents argued that leaving the EU would give the UK more freedom to control its economy there are still ongoing truffles and companies are having a difficult time adopting the new system and laws still. The UK economy would have been 5.5% bigger if no Brexit had not taken place.
