Assessing the economic implications of coronavirus and Brexit

It is currently unclear whether the UK will leave the transition period at the end of 2020 with a Free Trade Agreement (FTA) or without a deal. This analysis indicates that regardless of the trade scenario agreed between Britain and the EU, the direction in both the short and long run is clear:

• The Government’s proposed deal (FTA): medium-size negative impact on GDP.
• Leaving without a deal in place (WTO): large negative impact on GDP.

Coronavirus has complicated the picture further, with certain sectors and regions more severely impacted than others.

• Construction and banking, finance and insurance are expected to experience the most severe negative impacts from coronavirus.
• London and the East of England will face the greatest proportional underperformance, as they rely most heavily on the most-exposed sectors.

Regardless of whether Britain experiences a ‘U’, ‘V’ or ‘W’ shaped recovery after lockdown ending the transition period is likely to suppress growth. Leaving the European Union with or without a deal whilst recovering from the economic consequences of coronavirus will result in a double impact for particular sectors and localities.

• If the UK fails to negotiate a deal with the EU, the North West, West Midlands and East of England are likely to face a disproportionate double impact from coronavirus and Brexit.
• 70 NUTS3 areas rank in the top quintile of impact under a WTO-coronavirus scenario. 76% of areas in London fall in this category and 50% of the North West.
• One sixth of the areas in the top quintile of job impact under a WTO-coronavirus scenario have more than a third of their labour market working in either manufacturing or finance, banking and insurance etc.

Figure 1: Scale of long-term economic impact of FTA and WTO combined with medium-term coronavirus impact

Source: SMF analysis & HM Government