Analysis by the Centre for Economic Performance (CEP) at the London School of Economics highlighted growing business confidence and a notable increase in economic activity in April 2021 compared with the previous three months. The research also found that businesses are more optimistic about the next three months than they have been since the start of the pandemic.
However, more than three in five (61%) of firms say Brexit has caused them difficulties. According to the impacts of Covid-19 and Brexit on the UK economy: early evidence in 2021, UK exports and imports with the EU have fallen relative to a comparison group of other countries and more than a third of businesses report delays in transporting goods between the UK and EU, or additional customs and administrative costs.
Report co-author, CEP research assistant Josh De Lyon, said a large proportion of businesses are reporting that they are having issues directly related to Brexit: “COVID-19 was the largest shock to the world economy for a century. In the short term, the aggregate effects of COVID-19 have far outweighed those of Brexit. But there is still evidence of the economic impacts of Brexit in early 2021.
“It is inevitable that leaving the EU will raise trade costs to some degree, but the government can still help to mitigate these costs by providing information and infrastructure to support businesses in adapting to the UK’s most significant change in trade costs for a generation. A granular analysis of which industries and products are most affected will undoubtedly help to alleviate the costs of Brexit,” De Lyon said.
Kevin Hall, VAT Partner at Wright Hassall, said he was concerned that the country was losing sight of the permanent impact of Brexit on trade. “It’s as if we all have an expectation of depressed trade due to the pandemic. As a VAT adviser, I saw Brexit have a massive and immediate depressive effect on my clients’ GB exports to the EU. While that was spectacular, it’s the long-term effect that needs to be measured and managed.”
Hall said he believed the additional costs to trading in the EU would have a permanent dampening effect on both trade and profits across the UK, particularly among exporters who can’t afford advice to adjust to the new costs, the UK businesses they used to buy from, start-ups struggling with expensive new red tape and services-providers supporting diminished supply chains.
“To understand the success or otherwise of the steps being taken post-Brexit, we first need to separate out the pandemic effect and start reporting the Brexit effect on the economy, so we can see how our fundamentals are doing as a country,” Hall added.
Jeremy Thomson-Cook, Chief Economist at international business payments specialist Equals Money, said separating out the economic impacts of the pandemic and Brexit was difficult given the huge amount of stimulus provided by the Bank of England and government spending in the form of the furlough scheme.
“While the pandemic support has helped, it has acted as a delay for Brexit issues that will impact both supply chains and the demand that businesses will see,” Thomson-Cook said. “At the moment, the UK economy is outperforming a lot of its international competitors’ courtesy of the speed of the vaccine program and the level of take-up by Brits but that will taper off as furlough ends and the world returns to normality. It will be interesting to see how much Brexit hamstrings the economic rebound over the coming years compared to similar-sized economies like France.”
“It was easy for businesses to park their Brexit concerns last year given the existential threat that the pandemic presented to our way of life. Now that we can hopefully put COVID-19 behind us, focus will return to how British businesses can work with international supply chains and both foreign and domestic customers.”
De Lyon said investment in both physical and human capital would be crucial to the long-term adjustment to COVID-19 and Brexit. In the manufacturing sector, more firms expect to increase expenditure on worker training and innovation in the next 12 months than to decrease it but in the services sector, which includes hospitality and retail, firms are less optimistic.