Brexit trade drop to bring 0.5% GDP hit in first three months of 2021 – OBR

The UK’s economy is expected to take a hit in the first quarter of 2021 because of complications at the EU border caused in part by Brexit, according to a new estimate.

The Office for Budget Responsibility (OBR) said that trade is expected to have reduced between the UK and the EU, in part because of new restrictions introduced when the transition period ended.

Gross domestic product (GDP) is likely to be 0.5% lower during the first three months of the year as a result, the OBR said.

It added that December’s agreement on the future relationship between the EU and the UK gave it “no case for altering” a prior assumption that new trade barriers would reduce the UK’s long-run productivity by 4%.

Official trade volume statistics are not due out until next Friday, however the OBR cited a 10% to 15% drop in heavy goods vehicle traffic.

However, it warned that it was impossible to say how much of this was down to Brexit.

Lorry drivers were subject to extra Covid-19 tests while crossing the border in January, in a bid to slow the spread of a more infectious strain of the virus from the UK into Europe.

This, along with the stockpiling businesses were likely to have done in preparation for border disruptions, has “clouded” the trade picture, the OBR said.

Nevertheless, it said that “taking all these factors into account, we now expect the temporary near-term disruption to EU-UK goods trade to reduce GDP by 0.5% in the first quarter of this year.

“This reflects both that exports appear to have been hit harder than imports and that the trade disruption will affect UK supply chains.”

The OBR also warned that further trade disruption could come later in 2021.

So far the EU has imposed full customs requirements on exports from Great Britain, while the UK has delayed or reduced stringency until July in the way it applies some tax burdens and checks.

“As firms on both sides of the Channel grow accustomed to new trading arrangements, this disruption dissipates, though further disruption is possible when the UK enforces the agreement in full on its side of the border later in the year,” the OBR said.

The deal agreed between the EU and the UK on their future trade relationship has not changed the OBR’s forecast of the long-term economic impact of Brexit.

The trade deal has some benefits compared with a regular free trade agreement, but imposes non-tariff barriers to the services sector, which made up 42% of the UK’s exports to the EU in 2019.

In November last year the OBR estimated that Brexit would reduce the long-run productivity of the UK by 4%. It said that the new deal gave it “no case for altering” that estimate.