: Brexit takes its toll on U.K. economy as trade with EU falls sharply

United States

The U.K. economy shrank less than expected in January, but trade with the European Union fell sharply after the end of the Brexit transition period at the beginning of the year, numbers from the Office for National Statistics showed on Friday.

  • Exports of goods to the EU fell by 40.7% compared with December, and imports by 28.8%, by far the largest declines since comparable numbers began to be collected in 1997.
  • By comparison, exports to non-EU countries rose 1.7% and imports from the same group only fell by 17.6%.
  • The U.K. left the EU single market and its customs union on Jan. 1.
  • The ONS also said that gross domestic product in January shrank by 2.9%, way below an analyst consensus forecast of a 4.9% fall.
  • Besides shrinking trade, the GDP fall is mostly due to the COVID-19 pandemic restrictions to economic activity that were imposed shortly after the new year, including the closure of schools.
  • The hit to services and manufacturing was in part compensated by a significant increase in health spending, due to the nationwide rollout of a “test and trace” system.

The outlook: Expect GDP to pick up from March, after the beginning of a successful vaccination campaign, followed by the gradual reopening of the economy. But the trade numbers seem to show that the border problems are more than the Brexit “teething problems” shrugged off by the government.

The real trade meltdown may not be as large as reflected by the January numbers, because of an inventory pile up in December, when businesses prepared for Brexit in earnest. And the paperwork and compliance problems encountered by businesses to move goods across the border can be expected to ease in the coming months.

But a rising number of businesses are also devising new supply chains to avoid the costs induced by Brexit. And the magnitude of the fall in U.K. exports to the EU gives an idea of the economic price to pay for increased trade frictions with the country’s largest market by far.

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