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The regional economic impact of Brexit to date: many losers, few winners

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The regional economic impact of Brexit to date: many losers, few winners

As the end of the Brexit transition period draws nearer, CAGE economists uncover significant geographical disparities in the economic impact of Brexit so far.

While 78 districts can be seen to have benefitted economically from Brexit, 168 districts have lost on average 8.54 percentage points of output since the vote. These areas are largely poorer areas which have also been harder hit by the economic consequences of COVID-19.

Thiemo Fetzer and Shizhuo Wang of CAGE and Warwick Economics Department, use a synthetic control method to estimate the region-specific cost of Brexit to-date. They find that, on a regional level, nearly all regions have lost economic activity since the Brexit vote.

The West Midlands (-5.29 percent), Northern Ireland (-4.67 percent), the South West (-3.5 percent) and South East (-3.08 percent) lost the most in relative terms, indicating that regional economic inequalities have been exacerbated by Brexit.

Among the 382 districts of the UK, only 78 have benefited from Brexit, achieving on average 6.54 percentage points higher output relative to their controls. 168 districts on the other hand, have consistently lost out from Brexit, losing on average 8.54 percentage points of output.

The authors also find that the negative impact of Brexit on the economy is larger in areas where a) more people voted to leave b) the manufacturing sector is more prominent c) there are higher numbers of low skilled workers.

Significantly, these areas also have higher levels of furloughed workers as a result of COVID-19. For every 1 percentage point higher gap between a district and its synthetic control, the share of employees furloughed is 0.15 percentage points higher. The economic impact of COVID-19 may therefore intensify the negative impact of Brexit to date.

The research highlights growing geographical disparities in the UK economy, which are likely to be made worse by the current economic crisis. The authors warn that the relatively high employment rate across the country since Brexit may be a temporary phenomenon. Thiemo Fetzer said, “Due to the looming fear of an Australia-style No Deal Brexit, firms in the UK have been primarily increasing employment, rather than committing new long-term investments. The rationale is quite simple: workers can be quickly laid off once a hard Brexit becomes a reality. Capital investments, on the other hand, may be more difficult to salvage under a hard Brexit. The UK could therefore see significant adjustment to employment levels if an Australia-style No Deal Brexit becomes a reality next year.”

Thiemo Fetzer added: “The research finds that the costs of the Brexit vote to date may already exacerbate the very same regional inequalities that became all too apparent during the 2016 referendum vote. Much of the employment growth since 2016 is not supported by productivity growth, leaving those jobs on a shaky foundation.”

Maps of Brexit vote winners and losers and Brexit cost per capita

Notes: Left figure plots the classification of districts into losers, winners or no clear outcome, based on the estimate of the output gap obtained from the ensemble synthetic control that was constructed using the 101 potential synthetic control estimates constructed for each district. The right figure plots out the distribution of gross value-added losses measured in pounds per capita across UK districts as of 2018 expressed in real 2015 units.

Find out more

Fetzer, T and Wang, Shizhuo, ‘Measuring the Regional Economic Cost of Brexit: Evidence up to 2019’, CAGE working paper no. 486, July 2020

The research team have put together data visualisations of the economic cost of Brexit so far.

Chris Giles ‘Brexit vote hits leave areas the hardestFinancial Times, 16 July 2020