Eco Flash

United Kingdom: Has Brexit truly made the UK less attractive economically?

06/15/2023
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It is generally assumed that Brexit has made the United Kingdom less attractive economically. However, data on the balance of payments and foreign workers reveal that it’s not as simple as that.

Granted, as recently as March 2023, one UK company out of four ranked Brexit as one of its top three concerns. While that number had fallen since 2019, it does show that concerns have not disappeared entirely.

Real business investment (both foreign and domestic) in the UK was 0.4% lower in the fourth quarter of 2022 than in the second quarter 2016. However, this decline was not driven by weaker foreign direct investment (FDI) by non-residents in the UK, as this does not show up in the data.

Brexit has had a more notable impact on workforce flows. There have been fewer European worker arrivals since the second quarter of 2016, which the increase in non-European workers since 2021 has not yet fully offset. We estimate that 76,000 fewer foreign workers were employed in the UK than would have been, had the pre-Brexit trend in this category continued.

These comparisons suggest that Brexit did have a negative impact on the UK economy during the post-referendum period of uncertainty. But this period ended once actual Brexit details had been ironed out. Once a stable post-Brexit framework had been established, the UK got a boost, as direct investments and arrivals of foreign workers from countries outside the European Union (EU) made up the ground lost.

The UK is still attractive for foreign investors

Back in 2016, one of the main arguments put forth by Brexit opponents was that foreign direct investments (FDI) in the United Kingdom would dry up. Dhingra et al1. estimated at that time that an exit from the European Union (EU) would lead to a 22% decrease in FDI inflows into the UK in the 10 years after Brexit.
For the moment, balance-of-payments figures have ultimately belied this fear. Adding up FDI flows between 2009 and 2015, on the one hand, and those between 2016 and 2022, on the other, and comparing them to GDP, we find that inflows (i.e., investments in the UK by non-residents) rose from 1.6% of GDP from 2009 to 2015 to 3.1% from 2016 to 2022 (see Chart 1)2 . The same trend is found in FDI capital inflows alone (from 1.6% of GDP between 2009 and 2015 to 2.6% between 2016 and 2022).

UNITED KINGDOM: NET FLOWS OF FDI BY TYPE


In parallel, FDI outflows also rose, from 1.3% of GDP to 2.4%, driven by an increase in intra-group loans by British companies to their foreign subsidiaries. These intra-group loans may have had several causes. One of these would be that British companies have diversified their activities outside the UK, to the Netherlands, France, etc. This could be due directly to Brexit, particularly in the financial sector, as certain activities have been offshored, but without undermining London’s status as a financial hub.

The net sum of these shifts in FDI inflows and outflows is a decrease in net flows as a percentage of GDP between two periods under review (see Chart 2). However, based on a breakdown in FDI flows, this decrease does not necessarily mean that the UK has become less attractive. Quite the contrary, if we look at FDI capital inflows.