CEP LSE RSS Contact Us YouTube Facebook Twitter

BREXIT
Policy analysis from the Centre for Economic Performance

cover
CEP BREXIT Analysis
The Local Economic Effects of Brexit
Swati Dhingra, Stephen Machin and Henry G. Overman
July 2017
Paper No' CEPBREXIT10:
Read Abstract | Full Paper (pdf)

Tags: brexit; trade; uk economy; uk politics; north and south divide; uk living standards; local authorities

Wealthy Southern cities will be hit hardest by both a ‘soft’ or ‘hard’ Brexit - but are also best placed to adapt to economic shocks ahead


Successful cities with large high-skilled service sectors - which are mainly in the South of England - will be hit hardest by the likely downturn in trade after the UK leaves the EU, regardless of whether we face a ‘hard’ or ‘soft’ Brexit.

However, these cities are better-placed to adapt to the economic shocks ahead than less affluent places outside the South East - despite the latter being less directly affected by Brexit.

This is according to a new study published today by the think tank Centre for Cities and the Centre for Economic Performance (CEP) at LSE. It analyses for the first time the potential impact of both a ‘hard’ and ‘soft’ Brexit (1) on British cities in the ten years following the implementation of new trade arrangements with the EU.

The research shows that all British cities are set to see a fall in economic output as a result of leaving the EU, because of the predicted increase in trade costs that both a ‘hard’ and ‘soft’ Brexit will bring (2). The economic impact will be almost twice as big in the event of a ‘hard’ Brexit, which the research predicts will bring an average 2.3% reduction in economic output across all UK cities - compared to a ‘soft’ Brexit, which will result in a 1.2% decrease.

The report also suggests that in both scenarios, it is economically vibrant cities - predominantly in the South of England - which will be hit hardest and most directly by Brexit. This reflects the fact that these cities specialise in large knowledge-intensive sectors such as business and financial services, which the research shows will be most affected by the increase in tariff and non-tariff barriers that Brexit could bring

‘Hard’ Brexit - Top 10 cities most affected

Predicted reduction in economic output (gross value added)

 

‘Soft’ Brexit - Top 10 cities most affected

Predicted reduction in economic output (gross value added)

1

Aberdeen

-3.7%

 

1

Aberdeen

-2.1%

2

Worthing

-2.8%

 

2

Worthing

-1.5%

3

Reading

-2.8%

 

3

Swindon

-1.5%

4

Swindon

-2.8%

 

4

Slough

-1.4%

5

Slough

-2.8%

 

5

Reading

-1.4%

6

Edinburgh

-2.7%

 

6

Edinburgh

-1.4%

7

London

-2.6%

 

7

Gloucester

-1.4%

8

Aldershot

-2.6%

 

8

Northampton

-1.3%

9

Leeds

-2.6%

 

9

Aldershot

-1.3%

10

Ipswich

-2.6%

 

10

Middlesbrough

-1.3%

However, the report also argues that the most-affected cities are also best-placed to respond to the predicted shocks ahead. Places such as London, Reading and Aberdeen are home to large highlyskilled labour markets, significant numbers of innovative firms and strong business networks - all of which are crucial in enabling a city to reinvent or adapt its industrial structure to changing economic circumstances.

In contrast, the cities least directly affected by either form of Brexit are mostly less prosperous places in the North, Midlands and Wales - the regions often dubbed the UK’s ‘left behind’ places, and credited with driving the vote to leave the EU. These cities are largely characterised by low numbers of high-skilled firms and workers, and smaller knowledge-intensive private sectors - which means they are both less vulnerable to the predicted post-Brexit downturn, but also less well-equipped to respond to the economic shocks ahead.

‘Hard’ Brexit - Top 10 cities least affected

Predicted reduction in economic output (gross value added)

 

‘Soft’ Brexit - Top 10 cities least affected

Predicted reduction in economic output (gross value added)

1

Crawley

-1.1%

 

1

Crawley

-0.7%

2

Barnsley

-1.7%

 

2

Barnsley

-0.9%

3

Burnley

-1.7%

 

3

Hull

-1.0%

4

Hull

-1.8%

 

4

Blackpool

-1.0%

5

Wakefield

-1.9%

 

5

Oxford

-1.0%

6

Mansfield

-2%

 

6

Wakefield

-1.1%

7

Luton

-2%

 

7

Basildon

-1.1%

8

Telford

-2%

 

8

Luton

-1.1%

9

Swansea

-2%

 

9

Stoke

-1.1%

10

Blackpool

-2%

 

10

Burnley

-1.1%

Commenting on the findings, Andrew Carter, Chief Executive of Centre for Cities, said:

“All UK cities face significant economic challenges after we leave the EU, but the impact of both ‘hard’ or ‘soft’ Brexit will be felt very differently across the country. Contrary to much of the received wisdom on Brexit, it is the most prosperous UK cities which will be hit hardest by the downturn ahead - but poorer places across the North and Midlands will find it tougher to adapt.

“First and foremost, the Government should do all it can to minimise the coming economic shocks by securing the best possible trade deal with the EU. That means ensuring that our post-Brexit trading arrangements are as close to our current relationship with Europe as possible.

“But it’s also critical that the Government uses its forthcoming industrial strategy to give cities across the country the investment, powers and responsibilities they need to make their economies as successful and competitive as possible. This will be crucial in helping cities to respond to the changing economic circumstances as we leave the EU, and to address the other big challenges they face in the coming years such as globalisation and automation.”

Professor Stephen Machin, from the Centre for Economic Performance, said:

“This research shows that focussing on the likely local economic impacts of Brexit will be a critical ingredient for policymakers when thinking about how to offset the negative economic effects that loss of trade due to Brexit will bring.”

“A hard Brexit would amplify the negative impact of leaving the EU on local economies across the UK. The estimated decline in economic activity is higher in richer local economies like London. But Brexit - whether hard or soft - would still hurt economic activity in poorer areas like Hull and Burnley that have some of the lowest incomes in the country.

“The fact that the industrial specialisation and the skill and knowledge intensity of different places are key to local impact should be of significant importance to the design and implementation of policy, especially in the arenas of industrial, skills and labour market strategies.” ENDS


Notes for Editors:
  1. Soft’ Brexit is defined as a scenario where the UK joins a free trade area with the EU, such as EFTA. While tariffs would remain at zero, non-tariff barriers (including customs checks, border controls, differences in product market regulations and legal barriers) would increase the costs of trade.

    Hard’ Brexit is understood as the scenario in which the UK and EU do not immediately have a free trade area and the default situation is to trade under World Trade Organisation rules. This would result in an increase in tariffs and non-tariff barriers that would be substantially larger than under soft Brexit.

  2. The trade model developed by CEP uses the most comprehensive data on trade flows and trade barriers currently available, including industry-level data on exports and imports covering all sectors of the economy in every country in the world. It is used to predict the sectoral impact of Brexit under ‘soft’ and ‘hard’ Brexit
The sectoral impacts predicted under these two scenarios are then weighted using local employment shares to predict changes to GVA at the city level. It considers the medium run impact on GVA as it is assumed that it would take 10 years for the non-tariff barriers within the EU to converge to a new level post Brexit.

It is important to note that the model predicts the static effects of Brexit related increases in trade costs on city economies. This is likely to underestimate the impact of Brexit as the model does not take account of the other effects of Brexit, for example on innovation, foreign investment and migration.

About Centre for Cities
The Centre for Cities is a research and policy institute, dedicated to improving the economic success of UK cities. We are a charity that works with cities, business and Whitehall to develop and implement policy that supports the performance of urban economies. We do this through impartial research and knowledge exchange. For more information, please visit www.centreforcities.org/about

About CEP
The Centre for Economic Performance is an interdisciplinary research centre at the LSE Research Laboratory. It was established by the Economic and Social Research Council (ESRC) in 1990 and is now one of the leading economic research groups in Europe. The CEP studies the determinants of economic performance at the level of the company, the nation and the global economy by focusing on the major links between globalisation, technology and institutions (above all the educational system and the labour market) and their impact on productivity, inequality, employment, stability and wellbeing.

For further information, contact:

Henry Overman, Email: h.g.overman@lse.ac.uk;

Swati Dhingra, Email: s.dhingra@lse.ac.uk

Stephen Machin, Email: s.j.machin@lse.ac.uk

Brian Semple, Email: b.semple@centreforcities.org

Romesh Vaitilingam on +44(0)7768 661095, Email: romesh@vaitilingam.com ;