Britain’s Brexit gamble: will it reinvigorate economy or trigger permanent decline?

If Denmark left the EU, we’d probably have a relatively benign interpretation of it. It could be that the Danish, as one of the most technically advanced nations on the planet, fancied their chances outside of the increasingly dithery Brussels bureaucracy. It could be that they looked enviously at neighbour Norway’s fringe position. We’d argue, as a disinterested party might, the relative merits of a Denexit.

The UK’s divorce, saturated as it is with pompous soundings about Global Britain, elicits a more Pavlovian response here for obvious historical and cultural reasons. We carry too much political baggage for a cool, level-headed look at the UK’s prospects outside the EU. Ireland is sort of genetically disqualified from appraising Brexit on its own merits.

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The Northern Ireland component and the threat to peace on the island is perhaps where we can be legitimately offended. The narrative about technology being used to facilitate “frictionless borders” pushed by Boris Johnson and his Brexiteers in the lead-up to the UK’s departure was — as we can see from this vantage — just bluster. Ditto the stuff about wanting to protect the Belfast Agreement.

Brexit politicking will play out separate and at arm’s length from the economics of Brexit, a more profound and difficult to pin down process.

Everyone knows Johnson and the Tory Party don’t give two hoots about Northern Ireland. Democratic Unionists now know this first hand. Johnson has delivered, with their acquiescence, a post-Brexit Northern Ireland that has been economically and constitutionally loosened from its UK moorings.

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And his threat to unilaterally unpick parts of the Northern Ireland Protocol has more to do with deflecting attention from his own embattled political position than any real concern with the North. Picking a fight with the EU has been part of the Johnson playbook since his “bendy banana” days as a journalist.

And then there is the dog-whistling, anti-immigrant populism that a certain cabal in the Tory party seem to be nursing in the background, or in the foreground, in the case of the government’s Rwanda migrant plan.

But all this is mere smokescreen. Brexit politicking will play out separate and at arm’s length from the economics of Brexit, a more profound and difficult to pin down process.

We know the British economy is performing comparatively worse than its peer group. The (Organisation for Economic Co-operation and Development) OECD predicts it will grind to a standstill next year, maybe even dip into recession — the worst outlook of any industrialised country.

What happens to the Northern Ireland protocol now?

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But isolating the impact of Brexit from the lingering effects of the pandemic, the disruption to global supply chains, and the commodity price shock arising from the war in Ukraine — factors affecting all countries — is next to impossible.

Inflation in the UK, at 9 per cent, is also comparatively higher than in other economies. This could be because of the additional cost of imports arising from Brexit or because of the Bank of England’s looser monetary stance and bigger stimulus package during the pandemic.

The only thing that can be firmly laid at the door of Brexit — at this juncture — is the fall-off in trade with the EU. The new trading relationship has led to abrupt and persistent decline in UK imports from the EU — a drop of 20-25 per cent — and a less significant decline in UK exports to the EU.

The key driver of economic growth and living standards in any economy is, however, productivity ― a thorny, sleep-inducing concept — that nobody seems to understand. Talking about the rate at which a company or country makes goods, the ratio of people to materials or technology, has the same effect as a tranquilliser gun.

While global productivity growth slowed sharply after 2008, Britain’s has plummeted. Output per hour worked in the UK economy grew at 1.9 per cent a year between 1997 and 2007, but only 0.7 per cent between 2009 and 2019.

“It is that slower productivity that has led the [UK] economy as a whole to fall further behind the US and Germany over the last 15 years,” UK economist Duncan Weldon writes in a recent piece in The New Statesman.

The fear is that Britain is embarking on a similar path. Not a sudden economic shock that grabs the attention of the public and politicians, but a slow process that plays out over years and decades

How Brexit interfaces with the UK’s productivity malaise will determine the country’s future economic trajectory. Brexiteers believe a low tax, less regulated, free trading economy — some call it Thatcherism 2.0 — could reinvigorate the economy. Weldon believes “that agenda has foundered”.

“The plan to revive British capitalism with a dose of Thatcherite deregulation failed to engage with just how ‘British’ contemporary British capitalism actually is,” he writes. “The muscle memory of the 1980s might be strong in the Conservative Party, but British business has changed. It is more globalised, more integrated into international supply chains and much less nationally focused,” he says.

He goes on to warn that Brexit won’t result in a shock or a big bang, but a slow and lingering decline, comparable to the one Italy is suffering from. “As recently as the early 1990s it [Italy] was as rich as Germany when measured by GDP, or national income, per head. A decade later, in the early 2000s, it had fallen behind Germany but was still ahead of Britain,” he writes.

“Nowadays Italy’s income per head is closer to that of Spain. The fear is that Britain is embarking on a similar path. Not a sudden economic shock that grabs the attention of the public and politicians, but a slow process that plays out over years and decades; relative economic decline with a whimper rather than a bang,” Weldon says.