Brexit and the terms of the future UK-EU relationship will affect many different aspects of the UK economy. Although a lot is still uncertain, there are some broad observations that can be made about the potential economic implications of the newly-agreed Brexit deal.

First, we can compare this deal with the previous UK-EU agreement negotiated under Theresa May. Second, we can look at existing economic studies and try to get a sense of the potential long-term economic impact on the UK economy.

Economic differences between this deal and the last one

The key similarities and differences, in terms of the UK-EU future economic relationship, are:

  • Both include a transition period after Brexit up to the end of2020 (possibly extended up to the end of 2022). During this period, the UK remains in essentially the same economic relationship with the EU as now.
  • During the transition period, the UK and EU will negotiate the terms of their future relationship. The type of trade agreement sought by the UK is now different and looser than under the previous deal (more on this later).
  • If a trade deal is not agreed by the end of the transition period, the default position is now that Northern Ireland applies many EU rules (subject to a consent mechanism) but the rest of the UK would move to a no-deal/World Trade Organization (WTO) relationship with the EU following the transition period (possibly as soon as 1 January 2021).
  • Under the previous deal, if no new trade deal was agreed, the ‘backstop’ would have kicked in after the transition period. This meant the whole of the UK would have been in a customs union with the EU.

In summary, the key difference from a macroeconomic perspective is that after the transition period, the UK would be in a looser trading relationship with the EU than envisioned in the previous deal.

Economic impact is dependent on trade

While the new Withdrawal Agreement sets the terms of the UK’s departure from the EU, it is the accompanying Political Declaration that is most relevant in determining the future economic impact of Brexit. Unlike the Withdrawal Agreement, the Political Declaration is not legally binding although it does set the basis for negotiations on the future trade relationship.

The terms of any future UK-EU trade agreement will play a crucial role in determining Brexit’s impact on the UK economy over the longer term. No official economic analysis of this Brexit deal will be published ahead of the vote in the Commons on Saturday and the precise nature of the future UK-EU relationship is yet to be determined. However, we can look at past economic research to make some broad observations.

The vast majority of previous economic modelling exercises from the Government and others show that the higher the barriers (cost) of trading with the EU (via tariffs and non-tariff barriers), the larger the negative impact on the UK economy.

Analysis of the previous deal

In November 2018, Theresa May’s Government published analysis of the long-term economic impact of Brexit. This modelling compared how big the economy would be (measured by GDP) in different future UK-EU trading scenarios relative to a ‘baseline’ scenario of the UK staying in the EU. Two separate immigration scenarios were also considered.

Of the scenarios modelled, a WTO/No-deal outcome resulted in GDP being lowest over the roughly 15-year period the analysis considered. The model estimated that if the UK stayed in the European Economic Area (and therefore the Single Market) GDP would only be slightly smaller than remaining in the EU.

Scenarios of a future UK-EU trade deal based on the ‘Chequers’ White Paper published by May’s Government were also included.

It is important to note that the UK economy would grow in all Brexit scenarios considered, just at different speeds. The scenarios with slower growth results in the GDP level in the long-term being lower than scenarios with higher growth. (For context, if one assumes average annual growth of 1.5%, the GDP increase is 25% over 15 years.)

This chart examines the economic impacts of different Brexit scenarios

The scenario closest to the recently-agreed Political Declaration (PD) is the Free Trade Agreement scenario. The PD states that both the UK and EU “agree to develop an ambitious, wide-ranging and balanced economic partnership”. This would involve a “comprehensive and balanced Free Trade Agreement at its core.” The UK Government has stated this relationship with the EU makes it easier for it to pursue its goals of securing trade agreements with non-EU countries.

The 2018 Government analysis estimates that a Free Trade Agreement scenario with the EU would see GDP between 4.9% and 6.7% lower compared with staying in the EU, depending on immigration policy. Trade with the EU under this scenario is estimated to be 25% lower – and 5% higher with non-EU countries – than if the UK remained in the EU.

Possible GDP impact of a Free Trade Agreement

Most of this difference in GDP is due to additional non-tariff barriers with the EU (differing technical standards and regulations). The analysis shows  only minimal positive effects on GDP from changes to domestic regulatory policy and new trade agreements with a number of other countries (including the US, China and India).

The May Government analysis did not consider future domestic policy choices (beyond some “regulatory flexibility”), nor did it include global trends such as demographic trends and technological advancement.

Some have criticised the analysis for some of the assumptions made and arguably under-estimating the potential benefits from new free trade deals with non-EU economies. Nevertheless, the analysis was broadly in line with most other economic studies of Brexit and recent economic research by the UK in a Changing Europe think tank. There are plenty of uncertainties related to the UK’s future trading arrangements, not just with the EU but also the rest of the world. While economic analysis can help provide some guidance, the ultimate economic impact of Brexit is yet to be determined and open to change depending on the priorities of this and future UK Governments.

About the author: Daniel Harari is a Senior Library Clerk at the House of Commons Library, specialising in UK and international economies.