On the fifth anniversary of the UK leaving the EU, Stephen Hunsaker takes a look at the effects Brexit has had on the UK economy.
Since the 2016 referendum, Brexit has acted as a slow but transformative undercurrent shaping the UK economy. While some economists predicted an economic catastrophe and others anticipated a renaissance of sovereignty-fuelled prosperity, the reality has proven more nuanced. Brexit’s impact has manifested as a recalibration of trade, investment, labour, and industry. As the dust settles five years on, the UK continues to find itself grappling with structural changes while trying to chart a new course in an increasingly competitive and unpredictable global landscape.
Post-Brexit, a less expected development was how strongly the EU remained the UK’s largest trading partner, with the share of total trade increasing to above pre-Brexit levels. More expected, the post-referendum era has seen a continued divergence in the performance of goods and services. While goods trade has contracted sharply, with volumes down nearly 10% since 2019, services trade has shown surprising resilience. This divergence underscores a broader narrative: Brexit has exposed the UK’s vulnerabilities in manufacturing while highlighting its enduring strengths as a ‘services superpower’.
Small and medium enterprises have borne the brunt of non-tariff barriers introduced by the Trade and Cooperation Agreement. Many have ceased exporting altogether, reflecting the disproportionate burden placed on smaller enterprises by customs and regulatory requirements.
In contrast, the services sector has not only adapted but flourished, in part thanks to the flexibility of consultancy, IT, and creative industries. Establishing EU-based subsidiaries and shifting to remote delivery models mitigated much of the impact of Brexit, enabling sectors like computer programming and consultancy to expand their global footprint.
However, service sector adaptation has been uneven. Financial services, long a bedrock of the UK economy, have faced significant challenges. While the worst-case scenarios haven’t materialised, the sector has flatlined. The loss of passporting rights (which allows companies to operate in the European Economic Area with minimal additional authorisation in each country) has diminished London’s competitive edge as a financial hub, with high-profile relocations of bank’s European headquarters to cities like Paris and Dublin.
Investment, the lifeblood of long-term economic growth, has also faltered. Brexit-induced uncertainty compounded an already weak investment landscape, with business investment stagnating and public infrastructure funding suffering from the loss of European Investment Bank (EIB) support. While domestic initiatives, such as the National Wealth Fund (NWF), aim to fill the gap, they have yet to match the scale or efficiency of the EIB. Efforts to attract foreign direct investment and foster innovation in green technologies and advanced manufacturing remain critical, but the road ahead is steep as the replacement investment banks, like the NWF, lack the institutional credibility with private investors and credit rating. This investment shortfall dampened productivity growth and has weakened the UK’s ability to compete globally.
The impact of these investment challenges is particularly pronounced in the manufacturing sector. Manufacturing had long been a cornerstone of the UK’s economic identity, however for decades it has been in decline, Brexit only exacerbated that. Labour shortages, partly driven by changes in immigration flows, have compounded productivity challenges. Key sectors, ranging from logistics to food processing, face rising costs and constrained production capacities.
Brexit’s promises of regulatory freedom and global competitiveness have yet to materialise for manufacturing. Instead, increased costs, regulatory divergence, and non-tariff barriers have left many businesses ill-equipped to adapt to these changes. Export-heavy industries, especially in the North East, are particularly affected by these changes, as the cost of navigating post-Brexit trade continues to be a slow-burn disruptive process. The inability to recruit skilled workers domestically or from the EU has compounded the sector’s challenges. For small and medium enterprises in particular, the combination of labour shortages and rising costs creates a precarious environment. Businesses that once thrived on European markets now face hard decisions: adapt, relocate, or shutter operations entirely.
Looking ahead, the UK faces a delicate balancing act. The Labour government’s promised ‘reset’ of the UK’s relationship with the EU offers a chance to mitigate some of Brexit’s economic costs, but significant barriers remain. Trade agreements with non-EU countries have provided limited economic benefits, underscoring the importance of deepening ties with the EU and investing in domestic capabilities. The challenge lies in leveraging Brexit’s opportunities while addressing its long-term consequences.
Ultimately, Brexit has not been the economic catastrophe some feared, nor has it delivered the transformative gains others envisioned. Instead, it has acted as a slow puncture, subtly reshaping the UK’s economic landscape, making it more economically fragile, vulnerable to disruptions and therefore less reliable in the eyes of investors. However, as the country adapts to its new reality, success will depend on its ability to innovate and invest in the face of uncertainty.
By Stephen Hunsaker, Research Associate, UK in a Changing Europe