The economic impact of Brexit - Capital Economics

The economic costs of a “no deal Brexit” have diminished as the positions of the UK and EU have narrowed ahead of the end of the transition period at end-2020. We now believe that the key issue for the UK is less whether there will be a deal or a no deal, but the type of no deal Brexit that it would be.

Our view

  • It is impossible to say what the final outcome of negotiations will be. However, the size of the economic threat posed by a no deal Brexit has reduced since 2016 as the UK and EU have found areas of agreement and the UK has replicated trade deals with non-EU states.
  • There are different types of no deal Brexit. A “cooperative no deal” would see the UK and EU working to smooth the transition. Conversely, an acrimonious split would exacerbate initial disruptions and could even threaten arrangements that have already been put in place.
  • The COVID-19 crisis has thrown even the worst-case scenarios for the economic impact of Brexit on the UK into context. Nonetheless, depending on the level of cooperation, a no deal Brexit could reduce average GDP by 1-2.5% in 2021.
  • In isolation, Brexit will have negative impact on the UK’s potential growth rate. Longer-term, however, we think productivity gains for the UK economy from digitisation will offset the drags from Brexit.

The greatest sticking point in the UK-EU negotiations

 

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