Covid will get blame instead of Brexit for sluggish UK economy

In the 1970s when I worked in the Department of Finance on forecasting the Irish economy the first port of call was what was likely to happen in the UK because 60 per cent of Irish goods exports went to Britain. Rapid growth across the water invariably turned into a good performance in Ireland, while a UK recession was always bad news.

Today, as only 10 per cent of our goods exports go to the UK, it is only dramatic changes in the UK market – such as Brexit – that have significant impacts for us. The external economies that have most influence on our growth rates are now those of the US and Europe.

Last year the UK economy contracted by almost 10 per cent, worse than any economy in the EU bar Spain.

If pandemic-related disruptions persist, UK firms and households could continue to act with extreme caution, leading to economic stagnation

The collapse of the tourist industry due to Covid meant the EU countries whose national output fell most in 2020 were Spain, Portugal, Greece and Malta, all highly dependent on tourism. The structure of the UK economy should in theory have provided some insulation from the Covid crisis, with the City of London being little affected.

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The UK’s poor performance cannot be attributed to any lack of support by the government for households and companies. Rather Brexit is the most probable explanation for the UK’s worse-than-average fall in output, though the immediate impact of Brexit was disguised by the massive disruption due to the pandemic.

The UK National Institute for Economic and Social Research (NIESR) last week estimated that the UK, like other economies, has seen a vigorous recovery this year, and can anticipate above-average growth next year. Of course, these forecasts are conditional on the current post-pandemic recovery continuing. The institute says that if pandemic-related disruptions persist, UK firms and households could continue to act with extreme caution, leading to economic stagnation.

However, even with no further major Covid-related disruption output in the UK next year will only be marginally above its level before the pandemic in 2019.

By 2023 UK output is likely to be under 3 per cent higher than in 2019. While the numbers suggest Brexit has had a serious negative impact on the UK economy, and that this impact will continue to grow for a number of years, Covid may end up taking most of the blame.

If Northern Ireland manages to exploit the benefits of its access to the EU's single market for its goods this could offset some of the region's inbuilt disadvantages

These anaemic economic prospects will result in sluggish tax revenue, which helps explain the Conservative government’s planned fiscal tightening, in contrast to more neutral or expansive fiscal policies elsewhere. That stance will slow down the UK recovery.

By contrast, the pick up in the EU is much more vigorous, with output next year anticipated to be 3 per cent above its pre-pandemic level and 6 per cent higher by 2023. EU support for the worst affected countries will see EU fiscal expansion into next year. Spain is the only country in the EU 27 that is anticipated to show a slower recovery than the UK.

The NIESR maintains that the UK's current supply problems will continue to be aggravated by Brexit, dragging on growth. If the UK were to trigger article 16 over the Northern Ireland protocol the likely consequence is further disruption to UK trade and supply chains, choking back growth.

With the exception of Ireland, where disruption to EU-UK trade would hit us hard, the rest of the EU would be little impacted.

NIESR has examined the regional impact of the pandemic and the likely economic recovery across the UK. The best performing region is Scotland. London, while currently still badly affected by the downturn, is also expected to make a good recovery. Northern Ireland and the north of England are expected to take longest to recover.

The UK welfare system, once a model for Ireland, has been steadily eroded. Current welfare benefits are now roughly two-thirds of the equivalent Irish rates

Imports to Northern Ireland have been disrupted by the protocol, though the Šefcovic proposals should ease that. If Northern Ireland manages to exploit the benefits of its access to the EU’s single market for its goods this could offset some of the region’s inbuilt disadvantages.

As the UK government tightens the purse-strings this is expected to have a very negative impact on people dependent on welfare, particularly combined with rising inflation.

The UK welfare system, once a model for Ireland, has been steadily eroded. Current welfare benefits are now roughly two-thirds of the equivalent Irish rates.

NIESR estimates that the planned substantial reduction in the main working-age payment, Universal Credit, combined with the surge in inflation, will lead to a doubling of destitution in the UK. Poorer regions, like the north of England and Northern Ireland, will be hardest hit, alongside other communities or social groups with high rates of welfare dependency.