Brexit has made the UK economy 2.1% smaller: UBS model

A model resembling Frankenstein’s monster can help us
see how poorly the UK economy has performed since
Brexit.
Wikimedia
Commons

• The British economy is already more than 2% smaller
  than it would have been had voters decided to remain in the EU,
  a new analysis from UBS shows.
• Using a “Frankenstein” model, which cobbles together
  data from other major economies, the bank’s economists worked
  out the hit to UK growth.
• Alongside slower GDP growth, UBS said that investment,
  consumption, and the pound are all substantially lower than
  they could have been if the leave campaign had not
  triumphed.

You would have to look pretty hard to find an economist who
believes Britain’s exit from the EU will be — at least in the
short and medium term — anything other than a negative for the UK
economy.

With the exception of the group Economists for Brexit, every
bank, research house and think-tank has modeled a significant
decline in British economic output because of the Leave vote,
with scenarios where the
UK falls out of the EU without a deal showing significantly more
economic damage. 

Britain may be just six months away from leaving the EU, but it
has not happened. And yet, according to a new model from
economists at UBS, the damage to the economy compared to an
alternate reality where Britain had voted to stay in the EU, is
already clear for all to see.

Economists at the Swiss banking giant created what they call a
“Frankenstein” model of the British economy, cobbling together a
huge amount of data from different economies to effectively show
what the UK would have done without the Brexit vote. 

UBS concluded that while the UK economy is still growing steadily
more than two years on from the vote, it is roughly 2.1% smaller
than it would have been had remain triumphed.

It added that things would be even worse if it weren’t for the
strength of the global economy as a whole over the same period —
something that has dragged UK growth higher.

Here’s the chart:

UBS

Not only is growth more than 2% lower than it could have been,
UBS economists Pierre Lafourcade, Arend Kapteyn, and John Wraith
said, but inflation is 1.5% higher, investment is 4% lower,
consumption is 1.7% lower, and the real effective exchange rate
for the pound is 12% lower.

“To put that 2.1% cumulative decline in real growth into context,
that’s roughly a quarter to a third of the total Brexit costs
estimated in the most pessimistic assessments done prior to the
EU referendum (e.g. HM Treasury, OECD) and almost equal to the
full costs of some of the more optimistic assessments (e.g. LSE,
IFO, Open Europe),” the trio wrote to clients on Monday.

“But the UK has not even left the EU yet!”

The decline in the UK economy relative to a Remain outcome in the
referendum has been masked by other events going on around the
world, Lafourcade and his colleagues said.

“Why is it going largely unnoticed? Because the global economy
started to accelerate strongly right after the mid-16 referendum,
allowing UK GDP growth to move sideways rather than dive lower,”
the team wrote

“Without Brexit, however, we think UK GDP could have been 100 bp
[basis points] per year higher.”

The modeling of such a scenario, UBS said, effectively
encompassed “building a ‘Frankenstein’ UK out of bits and pieces
of 30-odd other countries in such a way as to mimic as closely as
possible history up to Brexit.”

“Essentially, using a partial least squares regression we can
construct a UK ‘clone’ entirely from other OECD country data not
affected by the Brexit vote,” the team wrote.