Quantifying the cost of Brexit uncertainty

By Walter Frick

More than three years after the referendum, businesses still don’t know what the outcome of Brexit negotiations will be, which means they’re bracing for an impossibly wide range of possibilities, on everything from terms of trade with Europe to immigration rules to domestic regulation.

Economic theory predicts that when firms face a highly uncertain future, they have an incentive to delay investment and hiring, and put off other decisions. And two new studies suggest that this is exactly what’s been happening in the United Kingdom over the past three years, resulting in substantial harm to its economy.

To measure the impact Brexit has had on the UK economy so far, economists from Stanford, the Bank of England, the University of Nottingham and the London School of Economics asked more than 7,000 UK-based executives how Brexit has affected their companies.

Their most recent working paper, published in August, links these survey answers to data on companies’ performance. The higher executives ranked Brexit as a source of uncertainty, the less their business had grown since the referendum.

“Anticipation of Brexit is estimated to have gradually reduced investment by about 11 percent over the three years following the June 2016 vote,” the researchers write. They also estimate that productivity in the UK has decreased by between 2 percent and 5 percent. (They estimate that Brexit has had a negative effect on employment, too, but this effect was not statistically significant.)

These figures align with recent headlines.

It’s an important takeaway for both businesses and politicians. While pulling back from global trade can cause significant economic harm, including lower productivity and less immigration, the way this is carried out matters, too.

Walter Frick is the deputy editor of hbr.org.


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