Brexit has 'significantly impacted' UK productivity and investment

Out-Law News | 02 Sep 2019 | 4:43 pm | 3 min. read

A report by the Bank of England (BoE) has found that Brexit has reduced UK productivity by between 2% and 5%, and cut UK investment by around 11% over three years.

The BoE carried out a survey of thousands of UK businesses to reach its conclusions, and found a causal link between Brexit and the reduction in productivity and investment.

In the academic research report (59 page / 2.5MB PDF), the BoE said investment by UK firms had dropped by 11% compared to what would have happened if the Brexit vote had not gone ahead. It said the fall in investment had taken three years to fully materialise, in contrast to initial forecasts after the June 2016 referendum which suggested investment growth would fall sharply for a year and then recover.

“This delay suggests firms may not respond as rapidly to large shocks that cause persistent uncertainty rather than short-term uncertainty, possibly because uncertainty leads firms to act cautiously,” the report said.

Brexit expert Clare Francis of Pinsent Masons, the law firm behind Out-Law, said: “The report underlines just how much the uncertainty and cost of planning for Brexit is really affecting firms. The business community have been crying out for some certainty to be delivered throughout this process to enable measured and proportionate planning – but without that certainty crystallising it means firms have had to spend speculatively to prepare and guard against shocks."

"Many firms committed significant management time and costs in actions such as stock piling in the run up to the March deadline. They are now facing these costs again for a second time in the run up to the new October 31 deadline. These costs directly hit the bottom line," she said.

The BoE found the drop in productivity had largely come from a negative “within-firm” effect, as companies were committing several hours a week of their managers’ time to Brexit planning.

It said between November 2018 and January 2019 10% of chief finance officers and 6% of chief executives were spending six hours or more a week preparing for Brexit, and over 70% of both roles were spending “some time” a week planning. Firms had spent on average a sum equivalent to 0.4% of annual sales on Brexit preparations by the spring of 2019.

The BoE said it had also found evidence of a smaller negative between-firm effect, with more productive, internationally exposed companies believed to have shrunk more than less productive, domestically focused firms.

The report found that the decision to leave the EU had caused a “high, broad and persistent increase in uncertainty”, with uncertainty reaching its highest point in September 2018 – when the EU rejected the UK’s Brexit proposal at a summit in Salzburg.

Although uncertainty declined after the withdrawal date was postponed until 31 October 2019, it remains higher than it was for the two years immediately following the referendum. For much of the three years since the referendum, Brexit has been in the top three sources of uncertainty for at least 38% of the firms surveyed.

The BoE noted that traditional measures of uncertainty based on stock market data, news or disagreement measures may imperfectly measure uncertainty over time in situations like Brexit which unravel over extended periods of months or years.

The researchers suggested that firms with higher Brexit uncertainty would have had lower growth in productivity and a greater reduction in size as a result.

“The UK’s decision to leave the EU is likely to have already led to a reallocation of activity away from more productive internationally exposed firms towards less productive local firms,” said the report.

The researchers found a tentative link between Brexit and lower employment, but said its results on this were not statistically significant – in contrast to its findings on investment and productivity.

The news came as the UK government launched its largest-ever information campaign to urge businesses and individuals to “Get Ready for Brexit”. The government said only 50% of the population thought it was likely the UK will leave the EU on 31 October, 42% of small-to-medium sized businesses are unsure of how they can get ready and just 31% of the British public have looked for information on how to prepare for Brexit.

The campaign will highlight areas such as how to export goods to the EU and will encompass television, social media, billboards and other platforms.