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JANUARY 2021 UPDATE: THIS BRIEFING WAS PUBLISHED PRIOR TO THE UK-EU TRADE AND COOPERATION AGREEMENT. HOWEVER, THE BROAD DISCUSSION OF THE POTENTIAL ECONOMIC IMPACT OF A DEAL REMAINS RELEVANT AND UNCHANGED.

The UK is scheduled to leave the Brexit transition period, and thereby the EU’s single market and customs union, on 1 January 2021. This will result in the nature of the UK-EU economic relationship changing, whether the UK and EU agree a free trade agreement (deal scenario) or not (no-deal scenario). In turn, this will impact the UK economy, as the EU is, by far, the UK’s largest trading partner.

The short-term impact in deal and no-deal scenarios

In the short term, additional trade frictions between the UK and EU will occur in both scenarios. There is also the possibility of immediate disruption to trade from 1 January 2021 due to the new rules with, for example, new border checks and customs formalities.

There will, however, be additional trade frictions in a no-deal scenario, such as tariffs on some goods. Prominent economic forecasters expect weaker economic growth if there is no trade agreement. The Office for Budget Responsibility (OBR), for example, expects UK GDP to be 2% lower in 2021 under a no-deal scenario compared with a deal scenario.

The long-term impact in deal and no-deal scenarios

Brexit is likely to lead to a long-term structural change in the UK economy, impacting areas such as trade, investment and immigration.

The vast majority of economic studies from the government (in 2018) 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 overall in the long-term. A no-deal outcome is associated with a greater hit to GDP.

The OBR, based on analysis of external economic studies, expects UK GDP to be around 4% lower in a deal scenario in the long-term compared to a scenario where the UK stayed in the EU. In a no-deal scenario the OBR expects GDP would be an additional 2%-points lower.

Uncertainty is high

There is a high degree of uncertainty surrounding such estimates and the economic outlook in general, not least due to the ongoing pandemic.


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