The economic impact of Brexit - Capital Economics

A last-minute deal with the EU means the UK economy sidestepped the potential damage from a “no deal” Brexit. Despite a grim near-term economic outlook, the removal of this overhang will ease the path of the UK’s recovery from the COVID-19 pandemic.

Our view

  • As the shape of a new EU-UK relationship forms, businesses can start to plan, while households are spared the inflationary hit to their real incomes that would have occurred in the absence of an agreement.
  • More trade barriers and lower EU migration may trim the UK’s growth rates of productivity and the labour force in future, but we suspect any such drag will be offset by faster productivity growth due to the digital revolution and the greater use of technology in the workplace.
  • We are more optimistic than most in expecting the distribution of vaccines and resulting removal of COVID-19 restrictions to allow GDP to rebound rapidly in the second half of next year.
  • As long as both monetary and fiscal policy are kept loose for a few years yet, then it is still possible that in the second half of this decade the UK economy may be no smaller than it would have been if COVID-19 never happened.

Webinar: The UK’s triple threat: COVID-19, Brexit and debt

On 19 November, Group Chief Economist Neil Shearing was joined by Paul Dales, our Chief UK Economist, and Senior UK Economists Ruth Gregory and Thomas Pugh for a briefing on the threats facing the UK economy. Their discussion took in the impact of reimposed virus restrictions, the possible economic outcomes of Brexit negotiations, how to address the hole in public finances, and how a vaccine could change our outlook for the economy in 2021 and beyond.
Watch a recording of the event here.