The U.K.'s exit from the European Union has already cost the U.K. a chunk of its economic output, according to the latest analysis by economists at UBS.
"U.K. gross domestic product (GDP) is already 2.1 percent lower in level terms than where it would have been without Brexit," UBS economists Pierre Lafourcade and Arend Kapteyn, and strategist John Wraith, said in a research note published Monday.
"Investment is 4 percent weaker, inflation 1.5 percent higher, consumption is 1.7 percent lower and the REER (the real effective exchange rate) is 12 percent more depreciated," the report added.
The economics team measured the costs of Brexit so far by analysing what the U.K.'s GDP would have looked like had the U.K. decided to remain in the EU. They based their methodology on a recent academic paper that essentially constructed "a U.K. 'doppelganger' out of GDP data from other OECD countries not affected by Brexit."
"Using that methodology we can also construct counterfactuals for consumption, investment, credit, inflation and the exchange rate," the economists said.
"To put that 2.1 percent cumulative decline in real growth into context, that's roughly a quarter to a third of the total Brexit costs estimated in the most pessimistic assessments prior to the EU referendum and almost equal to the full costs of some of the more optimistic assessments," the team noted.
"Without Brexit, however, we think U.K. GDP could have been 100 basis points per year higher."
Bad to worse?
Brexit negotiations between the U.K. and EU have arguably gone from bad to worse with both sides failing to agree the terms of their divorce due on March 29, 2019. Divisions remain over the border between the Republic and Northern Ireland — which will become an EU external border — and the thorny issue of trading terms.
Talks have reached an impasse with the EU's chief negotiator Michel Barnier rejecting U.K. Prime Minister Theresa May's so-called "Chequers Plan" that would see the country abide by a "common rulebook" for goods but not services.
In an interview this weekend with German newspaper Frankfurter Allgemeine Zeitung, Barnier appeared to pour cold water on the plan, reiterating the EU's position that the U.K. cannot pick and choose to keep or discard the parts of the EU "ecosystem" that it likes and dislikes.
As such, the possibility of a "cliff-edge" scenario where Britain leaves the EU without a trade deal or close alignment to the EU (conversely seen as a "softer" Brexit) is being seen by analysts as more probable.
Yet drastic economic predictions that the U.K. economy could enter recession after the Brexit vote in June 2016 have failed to materialize, with solid employment data and wage growth seized upon by Brexiteers as evidence that leaving the EU will not be as disastrous as opponents believe.
Nonetheless, growth forecasts for the U.K. look lackluster. In July, the International Monetary Fund lowered its U.K. GDP growth forecast for 2018 again, predicting 1.4 percent growth down from the 1.6 percent envisaged in its April forecast.
Still, Brexiteers can console themselves with the latest growth data that showed the U.K. economy grew 0.4 percent in the second quarter (from the previous quarter), the same as the euro zone as a whole. In the same period, Germany's economy grew 0.5 percent
UBS' economists also noted that the impact of the Brexit vote on U.K. businesses has not been as dire as expected.
"As is natural for anyone driving towards a cliff — in this case U.K. firms likely facing a sharp increase in tariffs and non-tariff barriers — one would expect them to start hitting the brakes: i.e. scale back employment and investment decisions as uncertainty mounts. But unemployment (4 percent) just nudged down to its lowest level since 1974, wage growth is increasing and gross fixed capital formation bounced back resolutely in the second quarter from its first quarter weakness," they said.
"Although many other data look decidedly lackluster, the seemingly muted reaction of U.K. firms feeds a narrative that Brexit uncertainty is doing a lot less damage than anticipated," they added.