United Kingdom or “the slow puncture” of a tyre

After a recession in the second half of last year, economic growth in the UK finally picked up in the 1st quarter of this year, exceeding forecasts at 0.6% (q/q). This recovery was driven mainly by household consumption, with real disposable income rising as inflation fell. Even so, inflation is still up by 3.2% year-on-year. However, this cyclical upturn masks a catastrophic structural situation. The consequences of Brexit continue to penalise the British economy as a whole. And the icing on the cake is that on 30 April the British authorities introduced physical checks on imports of agricultural and food products from the European Union. This new rule will cost businesses more than £330 million extra. The economic consequences of Brexit are edifying and should continue to weigh on British growth for several years to come. At the end of 2023, the level of British foreign trade (exports and imports) was 10% lower than in 2019, while that of the other G7 countries was 5% higher than in 2019. The difference is therefore 15 points, and the Office for Budget Responsibility (OBR) points out the obvious, namely that “the UK’s trade intensity has not recovered at the same rate as the other G7 countries”. And the decline is not limited to the European Union, but to all its trading partners, particularly through the indirect effects of supply chains that nobody had anticipated. Investment has plummeted and the European workforce has left the country, replaced by massive immigration from South Asian countries, with a decline in labour productivity. In economic terms, Brexit is a textbook case of the negative consequences of erecting trade barriers with its main trading partner (more than 50% of trade). According to economist Emily Fry, “it’s exactly what you’d expect from an economy adapting to new trade barriers: a loss of dynamism, like a slowly puncturing tyre”.  And the tyre is apparently not yet flat, judging by foreign trade and investment figures.