Long-term Economic Implications of Brexit

Roy, Graeme and Lisenkova, Katerina and McGregor, Peter and Figus, Gioele and Swales, John (2016) Long-term Economic Implications of Brexit. University of Strathclyde.

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Over the long term (i.e. 10+ years), most economists predict that the decision to leave the EU will have a negative impact on trade, labour mobility and investment.To date studies have concentrated on the UK as a whole. At the same time, they have tended to focus on the aggregate economic impact, with little assessment of the different impacts by sector.This report closes this gap by providing an inter-regional and multi-sectoral analysis of Brexit on Scotland and the rest of the UK.To undertake this analysis we examine the geographical pattern of Scottish international exports and identify the sectors most exposed to any changing trading relationship with the EU. We then make use of an inter-regional macroeconomic model of Scotland and the rest of the UK to examine the long-term impact on the Scottish economy.Our conclusion is that under all modelled scenarios, Brexit is predicted to have a negative impact on Scotland’s economy. Based on the modelling and assumptions set out in the report, over the long-term a reduced level of trade is expected to result in Scottish GDP being between 2% and 5% lower than would otherwise be the case. The range of impacts is driven by the nature of any post-Brexit relationship between the UK and the EU – the stronger the economic integration with the EU, the smaller the negative impact.We also find that the impact on Scotland, whilst significant, is estimated to be smaller than for the UK as a whole.Our modelling suggests that ultimately, the size of the relative impact by sector depends on a complex interplay between the EU-export intensity of sectoral sales and how responsive particular sectors are to changes in competitiveness. We recommend that focus is now given to sectors that have close trading links with the EU – e.g. food & drink and some manufacturing sectors – to fully understand the particular issues facing them on a product-by-product basis. However, we also find that other sectors which at first glance may not be thought as immediately at risk from a change in the UK’s relationship with the EU – e.g. professional services – should also be considered. This analysis makes clear that Brexit is not going to be straightforward.