New Perspectives

In Economics and Finance

Brexit – What Does It Mean?

The decision made by the UK electorate to withdraw from the EU (the snappily named ‘Brexit’) is one of the most significant events in our generation. It will have an influence upon the future development of both the UK and also the rest of the EU. Yet, despite the significance of this decision, or perhaps because of it, the understanding of what this is likely to mean for UK PLC is less than clear.

The ‘sound and fury’ of the referendum campaign was not particularly helpful in this respect, as it obscured as much as it explained. Neither has been the fact that the UK government were so apparently negligent as to fail to properly plan for the possibility of Brexit, despite their calling the referendum in the first place. However, in order to make the most of the advantages provided by Brexit, and mitigate against the costs, policy makers need an accurate understanding of the likely impact that Brexit will have upon the UK economy, in order to set an appropriate economic policy framework and decide upon optimum future trade relationships both with the EU and the rest of the world.

Superficially, this task should be relatively straightforward, because there were a number of economic studies that were published during the referendum campaign, which predicted that Brexit would result in varying degrees of economic damage. Indeed, it was suggested that there was a remarkable consensus amongst economists on this point.Unfortunately, upon closer inspection, not all of this evidence is quite as robust as might first appear. This is not to suggest that there was a deliberate bias in many of these studies, but rather that all works of this kind are inevitably reliant upon certain key simplifying assumptions which inevitably have a significant impact upon their predictions.

Why, for example, did the Treasury Report2 omit consideration of regulation from their calculations? Similarly, why did another group of studies3  base a large proportion of their warnings related to negative trade effects upon the assumption that Brexit would lead to reduced competition, without considering the possibility that a more globally orientated trade policy might increase competitive pressures?

In addition, all forecasts of this type use the simplifying assumption of ceteris paribus – all other relevant things remaining the same – in order to limit the scope of the analysis to manageable levels. However, in the case of Brexit, this is problematic because everything potentially changes. Indeed, the whole point of Brexit is to have the flexibility to do things differently than before.

To take one example, many of the economics studies pre-June 2016 had predicted that Brexit might lead to a reduction in trade between the UK and the EU. This estimate depended upon a number of factors which are still currently unknown, including, most obviously, the form of trade agreement that the UK negotiates with the EU. Some (but not all) studies sought to take this into account, by providing a range of possible forecasts depending upon different trading arrangements. However, none of them included in their calculations a forecast of how UK trade would grow with the rest of the world. Yet, is this not precisely what would be expected to happen? Membership of a trade bloc such as the EU, complete with an external tariff to make goods from elsewhere more expensive, will almost inevitably lead to some trade diversion from external to internal producers. Thus, leaving the trade bloc should reverse this situation, as UK consumers and firms might look to companies in the Commonwealth or the USA or China or anywhere in the world to buy products, and therefore trade with the rest of the world is likely to rise. The question, therefore, is whether or when this rising global trade might compensate for any reduced trade with EU nations. But sadly, this was not the question most studies had asked before Brexit.

A second issue to consider relates to policy changes. Again, this had been assumed away - ceteris paribus. Yet, the devaluation in the value of sterling, following the referendum result, will make UK exports cheaper, and should therefore have a stimulus effect on the UK economy, which will offset some or all of the negative consequences arising from Brexit. In addition, the studies had ignored the possibility that policy makers will act to mitigate any predicted negative impact arising from Brexit. Yet they would be remiss if they did not. The Bank of England, for example, has introduced a package of measures which it believes are sufficient to overturn its previous prediction that Brexit would lead to a modest fall in GDP4. Similarly, the UK government has indicated that its fiscal stance will be more relaxed, and less constrained by previous austerity targets, which will further boost economic activity, ceteris paribus. Consequently, even if all of the economic forecasts, produced during the referendum campaign, were strictly accurate at the time they were produced (and the jury is out on that matter), as soon as policy makers react to their predictions, their calculations change and results are modified.

Why does this matter? Well, for three reasons.

Firstly, because the results of academic studies, however nuanced in their original form, have been interpreted as firm evidence that Brexit will (not may, under certain assumptions) result in a decline in UK growth rates. This will, in turn, help to form the expectations of firms, deciding whether to invest immediately or to defer the decision until the results of Brexit are a little clearer. This starts to become a self-fulfilling prophecy, as a slowdown in investment is likely to reduce economic growth potential. It is important, therefore, to establish an accurate picture of what the available evidence does and does not indicate for the economic impact of Brexit.

Secondly, policy makers require the most accurate predictions in order to fine tune their policy design. If the forecasts of economic studies are too pessimistic, this could lead to an over-reaction, which could have inflationary consequences in the medium term.

Thirdly, the two months since the referendum have been characterised by a series of re-run debates on the merits of EU membership, and countless examples of prominent media figures demonstrating their personal angst over the result by questioning whether Brexit will lead to the worsening of virtually any subject they have been investigating, short of the weather! There are clearly a number of unresolved issues that have emerged from the referendum campaign for many people, and therefore it would be cathartic if the economic evidence, produced in a flourish during an intense political debate, could be subsequently re-evaluated to try and place some of the various claims into a better context.

If, after reading this short article, you are thinking that it would be a good idea if someone wrote a book examining these issues, then this is where I must declare a vested interest – my colleague and I have completed precisely this re-evaluation of the evidence and our book on The Economics of Brexit is out now.

Philip B. Whyman, author of The Impact of the Euro and co-author of The Economics of Brexit, is Professor of Economics at the University of Central Lancashire and Director of the Lancashire Institute for Economic and Business Research.
HM Treasury (2016), HM Treasury Analysis: The long term economic impact of EU membership and the alternatives, Cm 9250, The Stationary Office, London. Available via:
3Ottaviano, G., Pessoa, J.P. and Sampson, T. (2014b), ‘The Costs and Benefits of Leaving the EU’, CEP mimeo. Available via:; Ottaviano, G.I.P. and Pessoa, J.P., Sampson, T. and Van Reenen, J. (2014a), Brexit of Fixit? The trade and welfare effects of leaving the European Union, Centre for Economic Performance 016, LSE. Available via:; Dhingra, S., Ottaviano, G., Sampson, T. and Van Reenen, J. (2016), The Consequences of Brexit for UK Trade and Living Standards, Centre for Economic Performance (CEP) and London School of Economics and Political Science (LSE). Available via:;

The Economics of Brexit