Brexit cuts productivity by up to 5%, says BoE

Brexit has caused British companies exposed to Europe to cut investment plans significantly and has cut UK productivity by between 2 and 5 per cent, according to Bank of England research.

In the most comprehensive survey yet of the effect of Brexit on corporate Britain, about 6,000 companies revealed that uncertainty over leaving the EU had lowered capital spending on average by about 11 per cent.

The research’s findings of economic damage are likely to bolster MPs seeking to frustrate plans by Boris Johnson, prime minister, to plough ahead with a no-deal Brexit if the EU fails to renegotiate the current withdrawal agreement.

The survey’s results will give Tory rebels such as Philip Hammond, former chancellor, firm evidence to highlight the damaging effect of Brexit on business, prosperity and the public finances that underpin Mr Johnson’s ambitions to improve schools, hospitals and the police service.

The central bank staff paper, funded by the government in collaboration with Stanford and Nottingham universities, was based on detailed surveys with companies responding to questions on how Brexit uncertainty was affecting their businesses.

The significance of the paper is its claims to have found a causal link between Brexit and lower investment and productivity, rather than just a correlation. It did this by demonstrating that the companies with the most exposure to European trade that expressed a greater concern about Brexit uncertainty experienced the biggest falls in investment.

Other studies have compared the performance of the UK economy over the past three years with those of similar countries and have also suggested that Britain has lost between 2 and 3 per cent of growth over the past three years. But these have been criticised for not sufficiently proving a direct link between Brexit and the relatively poor performance of the UK economy.

The BoE research sought to address those points directly. It said that, since the EU referendum, “anticipation of Brexit has substantially reduced UK investment”, estimating the effect lowered capital spending by 11 per cent compared with what would have happened.

Real business investment has been flat since the 2016 referendum, which has been unusual at a time of high employment rates and lower than in other advanced economies.

The research did not find any statistically significant effect of Brexit uncertainty on employment, with companies that were more exposed to Europe not adding to employment any slower than others. With output down but employment unaffected, the research found that productivity, the Achilles heel of the UK economy over the past decade, had fallen sharply.

“The Brexit process is estimated to have reduced the level of UK productivity by between 2 to 5 per cent over the three years since the referendum,” it concluded.

The survey revealed that companies most exposed to Brexit uncertainties were hardest hit, but there was only tentative evidence that Brexit was causing the most productive companies to leave the UK. Other evidence from the survey suggested the drop in productivity occurred “because firms are committing several hours per week of top-management time to Brexit planning”.

The research was an academic paper, but the BoE’s policymakers have already taken it seriously, previewing the investment results in August’s inflation report and regularly referring to the survey on which the results were based.


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