King's College London

A new study led by researchers at King’s Business School, Stanford University, the Bank of England and the University of Nottingham finds that Brexit has left the UK economy significantly smaller than it would otherwise have been.

Drawing on almost a decade of economic data and evidence from one of the UK’s largest surveys of senior executives, the Decision Maker Panel (DMP), the study estimates that by early 2025 GDP in the UK economy was between 6 and 8 per cent below its pre-Brexit level.

Business investment is estimated to be between 12 and 18 per cent lower than the counterfactual path had Brexit not occurred. The authors describe the Brexit process as a long and protracted shock that depressed investment, restrained hiring and reduced productivity growth.

The analysis combined two approaches. A macroeconomic comparison that simulated how the UK would have performed had it continued to grow in line with a group of 33 comparable economies and a micro-level analysis using data from more than 7,000 firms participating in the DMP survey, matched to firm accounts. The firm analysis draws on differences in firms’ pre-2016 exposure to the EU to show how Brexit influenced their investment, employment and productivity.

The researchers report that investment fell sharply relative to comparable economies after 2016 and continued to diverge through the subsequent years. One of the dominant factors was uncertainty. Brexit created what the authors call a ‘large, broad and long-lasting increase in uncertainty’, with more than half of UK firms citing Brexit as one of their top three concerns at key points in the process. Persistent uncertainty can depress investment because it encourages firms to postpone or cancel capital spending. Capital spending includes purchases that increase a company’s productive capacity, such as machinery, digital systems and research & development.

The study also found that employment and productivity were each down by 3 to 4 per cent compared with where they would have been without Brexit. Productivity describes how efficiently a business produces output using its resources of labour and capital. Lower productivity often occurs when firms are holding back on investment, innovating less or spending time on tasks that don’t directly support growth. In the years where firms were preparing for potential trading changes, senior executives reported spending several hours a week on Brexit planning, time strongly correlated with lower productivity growth.

Although trade volumes with the EU began to fall only after the UK’s new trade agreement took effect in 2021, the authors highlight that the initial drag on the economy came less from trade flows and more from the prolonged adjustment process. They also note that Brexit offers rare evidence of the economic effects of raising trade barriers between major developed economies – a “reverse trade reform” at a scale not usually seen.

To read the full analysis, download the paper, The Economic Impact of Brexit, published by the National Bureau of Economic Research.