Thread by @shjfrench

The UK’s #Brexit debate has come back into focus with Swiss-style deal rumours, polling showing increased “Bregret” & signs of supply side frictions over & above pandemic legacy. A longish 🧵 on what, objectively, we see in data & some thoughts on impact to economic growth (1/n)

The cost of capital has undoubtedly increased for U.K. plcs since 2016. Equity for U.K. listed companies has become more expensive vs RoW as valuations have fallen: chart below. This also has 2nd order effects on incentives & activity to raise private & public capital in the U.K.

But 1st order effects of this has been on business investment. This has flatlined since 2016. While COVID/ mature business cycle made pre-16 trend unsustainable, looking at EU/US trends also suggests a material undershoot of ~£60bn/yr: chart below

Moving onto inward labour supply. In aggregate this has remained remarkably stable since Brexit but composition has changed. As non-EU migrants (now larger %) have lower employment rate the “bang for your buck” for U.K. employers of each additional unit of migrant labour is lower

The £ has faced a sustained devaluation since 2016. Most of this was a downward move post-referendum that has never recovered. This makes U.K. economic output less valuable in constant currency terms/ amplifies imported inflation. These effects are > trade competitiveness gains

Trade itself is rather harder to ascertain as data is v noisy, subject to revision & perhaps most importantly some of the eventual checks - on EU-UK imports - have not been implemented. But even here signs of a post transition lag (albeit hard to distinguish from CV19 noise)

Overall, these factors are worth about a 3% drag on GDP since 2016 in my view. There are also reasonable concerns of a longer headwind to competitiveness - & that this is not just a near-complete adjustment phase - but a downward shift in trend growth, with more to come.

At present we have ministers (government & shadow) openly denying this largely non-contentious economic evaluation - hiding behind factors such as measurement/modelling error, COVID or EU intransigence. Example here from the excellent @lizzzburden

https://twitter.com/lizzzburden/status/1587530195627565056

Recently domestic investors have asked what will generate reappraisal of (deeply unloved) U.K. assets. Is it an innovative growth plan? Is it supply side reforms? Or is it U.K. political class not openly pretending black is white? I’d argue the latter is most important short term

Why? Well this evaluation (or similar) is available to do by any allocator of capital across the world. They don’t need OBR/BoE/ this thread to do it - data is hiding in plain sight! So U.K. ministers don’t look like serious people if they are pretending the impact doesn’t exist

None of this is to suggest there aren’t marginal benefits (as yet largely unharvested) of Brexit. Theoretically a more tailored regulatory framework, nimble industrial policy, even a bit of competitive arbitrage (albeit with escalation risks with a powerful neighbour) are there

Also I respect those that saw the UK’s EU membership as unsustainable, longterm, amidst EU/EZ plans for further integration. For many the inability to espouse a role for U.K. in EU was part of the issue. Removing that problem was a trade of problems - rather than eliminating them

So part of repair job to this 3% (& growing) hit to GDP starts with honesty over the economic impact of the Brexit vote. Yes, the betrayal narrative is forceful, but so is judgement of key economic actors when (as now) guardians of U.K. policy fail to acknowledge reality /END