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Brexit will deliver double shock to UK economy, study finds

Exclusive: LSE report says even sectors unscathed from coronavirus crisis will be severely affected

LSE researchers say Brexit will cause the ‘biggest slowdown of our lifetime’ by imposing barriers to trading goods or services with the EU.

LSE researchers say Brexit will cause the ‘biggest slowdown of our lifetime’ by imposing barriers to trading goods or services with the EU. Photograph: Rui Vieira/PA

Brexit hit is looming for sectors that have emerged relatively unscathed from the Covid-19 pandemic, analysis by the London School of Economics suggests.

The LSE report says Brexit will deliver a double shock to the economy – with business conditions worsening for those sectors that have survived the impact of coronavirus and lockdown measures – whether Boris Johnson secures a deal with the EU or not.

The analysis, seen by the Guardian before its publication on Wednesday, includes information from a monthly survey of Confederation of British Industry members.

“Our analysis shows that the sectors that will be affected by Brexit and those that are suffering from the Covid-19 pandemic and lockdown are generally different from each other,” said Swati Dhingra, an economics professor who co-authored the report.

A “simultaneous impact” from Brexit and coronavirus will be felt across the business spectrum from the autumn when the chancellor Rishi Sunak’s pandemic policies aimed at supporting the unemployed end and the new trading environment for the UK outside the EU begins to bite, the research finds.

Covid and Brexit impact

Covid-19 and Brexit impact. Photograph: London School of Economics

The report, Covid-19 and Brexit: Real-Time Updates on Business Performance in the United Kingdom by the LSE’s Centre for Economic Performance, shows sectors that entail more human contact – including hospitality, air travel, restaurants, hotels, and arts and entertainment – have been the hardest hit by the pandemic.

The affect on other sectors such as the scientific industries, professional services, including accountancy and legal services, and publishing has been less severe because they can continue to operate with staff working from home.

Among those reportedly continuing to operate with remote working are firms such as Vodafone, Google, the accountancy firm KPMG, GlaxoSmithKline, Rolls-Royce and the consumer goods group Unilever.

But Brexit will impose barriers on those trading goods or services with the EU, whether it is pharmaceutical companies seeking regulatory approval, banks or services needing to transfer data from servers in the bloc or car manufacturers or clothes importers being required to fill in customs declarations for the first time in decades.

The report points out that as far back as 2017 the government announced that Brexit would be guided by impact assessments across sectors; it has provided detailed analysis in only 10 sectors to date.

“The government must move beyond its broad assessment of Brexit impacts to much more finely tuned plans” in preparation for the “biggest slowdown of our lifetime” said Josh de Lyon, a research assistant at the LSE centre who co-authored the report.

Dhingra said the coronavirus pandemic had “reduced the capacity of the UK economy to take further shocks”, and “rushing Brexit through” would “broaden the set of sectors” that experienced worsening business conditions.

Using monthly data collected by the CBI on business experiences and expectations of growth or declines, along with what it describes as “state of the art” modelling, the centre has been able to assess the outlook for the next three months.

LSE, like other big institutions, is loath to put a figure on the projected combined shock to the economy although various sectors have warned of hardship coming down the tracks. The manufacturing body Make UK warned that more than half of the manufacturing sector was planning redundancies when the business support schemes ended.

The LSE report urges the government to put in place an industrial strategy that “must reflect” the cold reality of “being in a post-Brexit UK which is placed in a post-Covid world economy” in which global trade shrinks.

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