4. Economic context

Section contents


  • Trade plays a critical role in the economy
    • UK economy will grow more slowly with Brexit than without
  • 80% of UK economy is devoted to services; 10% is devoted to manufacturing
    • Manufacturing accounts for over 50% of UK exports – so critical for trade
  • UK economy has recovered to pre-pandemic levels but is expected to lag G7 in 2023
    • Since referendum, £ has weakened against $ and €, causing inflation to rise but helping exporters
    • Brexit trade impacts mean UK trade has not recovered as well as other OECD countries
  • OBR sees economic impacts of Brexit as
    • Reduced GDP of 4%, mainly due to the effect non-tariff barriers with the EU
    • Exports and imports will be around 15% lower in the long run than if UK had remained in EU
    • Trade deals with non-EU countries will have an immaterial impact
    • Long-run impact of £90 billion lost GDP (based on 4% of 2018 GDP)
  • UK has high employment but low productivity relative to other advanced economies
    • Real wage levels declined between 2008 and 2015 but started to grow in 2018
    • In 2022, real wages are falling as inflation rises

Click here for summary of Brexit FactBase.

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Global outlook

Outlook for 2022 and 2023

The IMF, in its April 2022 Global Outlook Update, says:

“The war in Ukraine has triggered a costly humanitarian crisis that demands a peaceful resolution. At the same time, economic damage from the conflict will contribute to a significant slowdown in global growth in 2022 and add to inflation.

Fuel and food prices have increased rapidly, hitting vulnerable populations in low-income countries hardest.Global growth is projected to slow from an estimated 6.1 percent in 2021 to 3.6 percent in 2022 and 2023. This is 0.8 and 0.2 percentage points lower for 2022 and 2023 than projected in January.

Beyond 2023, global growth is forecast to decline to about 3.3 percent over the medium term. War-induced commodity price increases and broadening price pressures have led to 2022 inflation projections of 5.7 percent in advanced economies and 8.7 percent in emerging market and developing economies—1.8 and 2.8 percentage points higher than projected last January.

Multilateral efforts to respond to the humanitarian crisis, prevent further economic fragmentation, maintain global liquidity, manage debt distress, tackle climate change, and end the pandemic are essential.”

Economic forecasters still expect that the UK economy will grow more slowly as a result of Brexit than it would have done without it.  For more detail, scroll down to Brexit impact.

Source: IMF, World Economic Outlook Update, April 2022


GDP rankings

The US (27.9%), EU (20.4%) and China (19.6%) dominate the world economy, accounting for 67.9% of global nominal GDP in 2020 – see Figure 4.1.

Figure 4.1: World nominal GDP in 2020 (source: World Bank)

The UK accounted for $2.8 trillion or 3.7% of global nominal GDP in 2020. The UK ranked fifth globally, with the EU27 treated as one entity, behind the US, EU, China, and Japan. Treating the EU member states as separate countries, the UK ranked fifth globally, behind Germany, but ahead of France.

To compare countries, economists use the Purchasing Power Parity (PPP) method. The PPP method adjusts each country’s GDP to represent its purchasing power for a common basket of goods.

Using World Bank PPP data, the rank order of countries changes.

  • China came top with 18.3% of world GDP, ahead of the US with 15.8% and the EU27 with 15.1%.
  • UK ranked 11th (with 2.3%) below China, US, India (6.7%), Japan (4.0%), Germany (3.4%), Russia (3.3%), Indonesia (2.5%) France (2.4%) and Brazil (2.5%).

World Bank, GDP data for 2020
World Bank, GDP,PPP (current international $), 2020 figures

Gross National Income per capita

To compare wealth creation between countries, economists also use PPP Gross National Income per capita. See Table 4.2 for the estimated 2019 rankings from the World Bank. (GNI measures the income generated by the residents of a country, whereas GDP measures the income produced by a country, which may include additional items such as overseas corporate income).

PPP GNI per capita is a simple average measure of national wealth and does not, for example, consider how wealth is distributed across a country’s population. On this measure, the top countries include several countries with small populations and either thriving economies or wealth from natural resources.

On a PPP GNI per capita basis the UK ranked, in 2019:

  • 26th globally;
  • Below 10 EU countries (Luxembourg, Ireland, Denmark, Netherlands, Austria, Germany, Sweden, Belgium, Finland, France)
  • Below EFTA countries of Switzerland (6), Norway (7) and Iceland (15).

Brexit is expected to cause the UK economic growth rate to lag other developed countries which is likely to cause the UK to move down the rankings.

Source: World Development Indicators database, World Bank, 11 May 2022 


UK economy


Principal industry sectors

The UK’s principal economic sectors are in services rather than manufacturing (see Figure 4.2).

Gross Value Added (GVA) measures economic output. In 2018, total UK GVA was £1.91 trillion.

  • Service industries made up 79% of GVA, (£1.52 trillion out of £1.91 trillion).
  • Manufacturing provided £189 billion or 10% of total.
  • Remainder was dominated by the construction sector which provided £116 billion (6% of total).

The manufacturing sector accounts for over 50% of UK exports and is critical for the health of UK trade.

Within services:

  • Retail estate activities contributed £252 billion (13%).
  • Retail and wholesale industries contributed £202 billion (11%).
  • Professional, scientific and technical activities industry contributed £149 billion (8%).
  • Finance and insurance services industry contributed £135 billion (7%).
  • Agriculture, forestry and fishing contributed £14 billion – less than 1%.

Employment by industry was broadly in line with output. In 2018 the UK employed 31.7 million people:

  • Service industries employed 26.6 million people, 84% of UK workers.
  • Manufacturing employed 2.5 million people or 8%.
  • Construction industry employed 1.5 million people (5%).
  • Agriculture, forestry and fishing employed 0.5 million (2%).

See Appendix B for a detailed breakdown of UK GVA by sector and sub-sector.

*Definition of Gross Value Added. The economic output of part of the economy, such as an industry sector or region can be measured and compared using Gross Value Added (GVA), a measure of economic activity. In brief, GVA is the contribution of part of the economy, minus any costs of materials or services used in the production of the output. GVA forms the basis out of which salaries and wages are paid and profits for shareholders are earned.

ONS, Regional gross value added (balanced) by industry: all NUTS level regions, 19 December 2019
ONS, Broad Industry Group (SIC) – Business Register and Employment Survey (BRES), 25 September 2019


Output trends and business activity

The services sector has driven the UK recovery from the 2007/8 financial crisis. Manufacturing growth has been weaker and construction more volatile (see Figure 4.3). Services growth has underpinned GDP growth.

Figure 4.3: Sectoral output and GDP (indexed)

UK economic growth, consumer spending growth and investment growth fluctuated between 2016 and 2019, but the growth rate for all three trended downwards (see Figure 4.4).

Investment rose in the first and third quarters of 2019, and stock-building jumped, but temporarily owing to contingency plans for a possible ‘no deal’ Brexit.

Figure 4.4: GDP, consumer spending and investment


Exchange rate

Sterling had weakened against the US dollar since mid-2018 and had been relatively weak against the Euro since the referendum, but saw some strengthening in 2021 (see Figure 4.5).

At 9 May 2022, since the referendum, sterling had weakened against the euro by 11% and the dollar by 17% (see Table 4.3), which has pushed up import prices. This has helped UK exporters and supported the FTSE100 since the referendum (around 80% of FTSE100 earnings are earned overseas, so, when sterling weakens, the FTSE increases).

The Bank of England dropped interest rates in August 2016 (to 0.25%) in response to the referendum. It raised interest rates in November 2017 (to 0.5%) and in August 2018 (to 0.75%), which has supported sterling. In March 2020, in response to Covid-19, the Bank dropped interest rates twice – on 11 March (to 0.25%) and on 19 March (0.10%).

Some argue that May 2015 is a relevant benchmark because the Conservatives won the General Election and their manifesto committed to hold a referendum on EU membership. The relevant exchange rate changes a fall of 16% against the Euro and 21% against the dollar are shown in Table 4.3.

Figure 4.5: EUR/GBP and USD/GBP exchange rates

Table 4.3: Exchange rates
May 201523 June 201624 June 20169 May 2022vs May 2015vs 23 June 2016
Source: Bank of England spot rates


Since the referendum, annual UK inflation (measured using the Consumer Price Index – CPI) peaked at 3.1% in December 2017, reduced in 2018 and stabilised in 2019. In 2020 the effects of Covid initially reduced inflation to almost zero but, in 2021, due to supply chain issues and labour shortages, inflation picked up.  In 2022 the Bank of England projects that CPI could reach 10% but there is considerable uncertainty about the estimate (see Figure 4.6). The war in Ukraine is a major factor as are global oil and gas prices. However the BoE currently expects inflation to track down in 2024 to and then below its target of 2% in 2025. As the width of the fan in the chart indicates, the projections are uncertain.

Figure 4.6: Bank of England inflation projection

Source: Bank of England, Monetary Policy Report, May 2022


Employment, productivity and real wages

The UK has high rates of employment but low productivity.

Employment rates

The proportion of people aged from 16 to 64 in work is known as the employment rate. Employment rates have been generally increasing since early 2012 until Covid in 2020.  For the latest period, December to February 2022, the UK employment rate was estimated at 75.5% but still below the pre-Covid level.  Economic inactivity has been increasing and is currently at 21.4%.

Figure 4.7: Employment, unemployment and inactivity rates

Source: ONS, Employment in the UK, April 2022

For non-UK non-EU nationals the employment rate has been consistently lower than that for UK nationals, (see Figure 4.8) partly due to lower participation in the labour market from some population groups, for example, Pakistani and Bangladeshi nationals.

In the period October to December 2019, there were:

  • 27.2 million UK nationals working in the UK, 160,000 more than for a year earlier.
  • 3.4 million non-EU nationals working in the UK, 25,000 more than for a year earlier.
  • 2.4 million EU nationals working in the UK, 133,000 more than for a year earlier.

Figure 4.8: Employment rates for UK and non-UK nationals

Source: ONS, UK and non-UK people in the labour market: February 2020



UK productivity growth has slowed since the financial crisis: average growth since 2011 has been less than half pre-recession levels (see Figure 4.9). The underlying measure is real GDP per hour worked.
  • Labour productivity in the UK has consistently lagged other advanced economies such as France, Germany, Sweden and the US.
  • Comparative international evidence suggests that the main reasons for lower UK productivity relative to other advanced economies are:
    • Relatively low UK levels of investment and R&D spending;
    • High number of companies and workers with relatively low productivity and skills.
  • UK’s flexible labour markets, supported by migrant workers and longer working lives, may encourage relatively labour-intensive business models
PwC concluded that more upskilling, investment and regionally-balanced growth could help the UK reduce its productivity gap with other advanced economies.
It’s also important to note that new Brexit trade barriers and additional bureaucracy combined with reduced trade volumes reduce productivity in those businesses that are affected.
Figure 4.9: Growth in UK output per hour worked 1997-2021

Source: ONS, Labour Productivity


Real wage growth

The UK’s poor productivity record has affected real wages compared to other economies. Figure 4.10 shows that between 2008 and 2015, UK real wages fell by 1% a year.  This put the UK 103rd out of 112 countries for wage growth over the post-crisis period (International Labour Organisation figures). The average wage growth across all countries was +2.3% a year and the median +1.6% (often, less-advanced countries grow real wages faster than advanced countries).

The worst OECD performer was Greece, but the UK was the next worst (and then Italy). Between 2008 and 2015, the UK’s real wage growth rate was the worst of all the major EU economies. The majority of OECD countries ranged from the middle or 50th percentile to the 90th percentile.

Figure 4.10 Post-crisis real wages, average annual growth 2008 to 2015

Source: TUC, UK 103rd out of 112 in global ranking for real wage growth since the crisis
27 Feb 2017, Geoff Tily

Real wages started to grow in the UK from the beginning of 2018, dipped during first stages of the pandemic, and started to rise again from mid-2020. However real wages are falling in 2022 as inflation increases (see Figure 4.11)

Figure 4.11: Real average weekly earnings single-month annual growth rates in Great Britain


Why trade matters

Role of trade

Trade plays a critical role in the economy.  Trade allows a country to specialise in producing and exporting goods and services where it has a comparative advantage, which enables it to import other goods and services that it produces less efficiently.  International goods and services exports accounted for 31% of UK gross domestic product (‘GDP’) in 2018.

The government estimates that exports supported 6.5 million jobs in the UK in 2016.  Around 58% (3.8 million) of these jobs were in exporting industries and 42% (2.7 million) were in the UK supply chain of exporting industries. Specialisation raises productivity, which leads to higher real incomes. The government found that roles linked to exports were 21% more productive and 7% higher paying than other equivalent roles.

Imports are also critical: they serve the needs of UK consumers such as for food, electronics, technology, and medicines. More important, most imports are destined for producers, not consumers. Imports and exports, and goods and services are interlinked. Manufacturers use services in the production of goods, and goods traders often trade services. For example, about 30% of firms that export goods also export services.

Before Brexit, more than half of the UK’s imports from the EU – such as raw materials, auto components, chemicals, and business services – were intermediate goods and services or inputs to the production of finished goods and services, many for export. In the other direction, 70% of UK exports to the EU were intermediate goods and services for use by companies rather than consumers. For UK trade with non-EU countries, around 60% of both imports and exports were intermediate goods and services.

See the second section on trade for detailed analysis of UK trade.

Components of GDP

The other main components of GDP expenditure are household spending, government spending and investment. Figure 4.12 shows the breakdown for 2018 (from ONS), the last stable year of trade patterns before preparations for the UK’s EU exit, and, then, Covid disrupted them. Please see the section on investment for trends in business investment and foreign direct investment.

Economists typically use Q4 2019 as a pre-pandemic reference point, but we prefer to use 2018 as our pre-Brexit reference point because ONS regards it as the last year before Brexit began to disrupt trade patterns significantly.

Household spending was 65% of GDP followed by government spending (18% of GDP) and investment (18% of GDP and a key driver of future prosperity). Trade expenditure is measured as exports minus imports, which results in the trade balance – a small net figure (-1% of GDP). Note that GDP statistics usually exclude inflation because it does not create value: the preferred measure is ‘real GDP’. (Figures below are in 2019 prices.)

Figure 4.12: Components of GDP expenditure

‘Trade openness’ is an important complementary indicator which measures all trade (exports plus imports of goods and services) as a proportion of GDP. It indicates the openness of an economy and its depth of integration with the global economy. The UK’s trade openness was 62% in 2018, above the global average of 57%. Sometimes trade openness may be measured using only goods trade.

‘Trade intensity’ is another important trade indicator. It expresses exports of goods and services as a percentage of GDP – a measure of the success of ‘global Britain’.  In 2018, UK trade intensity was 31%, just above the OECD average of 30%.

Department for International Trade, Estimating the relationship between exports and the labour market in the UK, 10th March 2021
Institute for Fiscal Studies, Firms’ supply chains form an important part of UK-EU trade: what does this mean for future trade policy?, 8 January 2018
UK Trade Policy Observatory, Links between services and manufacturing trade in the UK: Mode 5 and Beyond, January 2022, Ingo Borchert, Michael Gasiorek, Guillermo Larbalestier and Nicolo Tamberi
World Bank, Trade as % GDP
GDP first quarterly estimate, UK: October to December 2021, Office of National Statistics, 11 February 2022
OECD, Trade statistics


COVID-19 impact

According to the Office for Budget Responsibility (OBR) in March 2022:

“The rebound in output in January suggests a strong recovery from Omicron and some easing of supply bottlenecks at the start of the year.

The latest monthly GDP data show an Omicron-induced fall of 0.2 per cent in December followed by a rebound of 0.8 per cent in January. This took monthly output to 0.4 per cent above its January 2020 pre-pandemic peak following a trough of 25.3 per cent below in April 2020, during the first lockdown.”

“However, GDP sectoral composition remains significantly affected by the pandemic. Some sectors (notably health and warehousing) are operating substantially above pre-pandemic levels but others (notably travel and higher- contact services) are still operating well below.”

Figure 4.13: Sectoral GDP recovery

“Since the start of the pandemic, business investment has been weak and has recovered more slowly than other elements of expenditure as high levels of uncertainty have generated hesitancy in committing to longer-term projects.

In the final quarter of 2021, business investment remained over 10 per cent below its pre-pandemic peak. Surveys suggest that supply bottlenecks are also holding back investment and the super-deduction (announced in the March 2021 Budget) appears to be incentivising the bringing forward of businesses investment less than OBR had expected.

The super-deduction and the easing of global supply bottlenecks means OBR still expects historically high growth over 2022. Once the incentive is withdrawn, business investment growth slows sharply. It then picks up again towards the end of the forecast.”

Figure 4.14: Trends in real business investment

OBR, Economic and Fiscal Outlook, March 2022

The Social Market Foundation, Assessing the economic implications of coronavirus and Brexit, May 2020

Brexit impact

Before the Brexit vote, the UK was performing at the top of the G7 countries. However, by the end of 2019  there was little headroom for the economy to absorb further turbulence or shocks from Brexit.  UK GDP growth in real terms had been positive 2017-2019, but low compared to historic trends:

  • 2017 1.9%
  • 2018 1.3%
  • 2019 1.4%

Speaking to the House of Lords Economic Affairs Committee on 30 January 2018, the Governor of the Bank of England, Mark Carney identified the main impacts of Brexit:

“After the referendum, the pound fell, sharply, inflation went up, and growth slowed.” ….. “Business investment is likely 4 percentage points lower than it would’ve been had the U.K. voted to stay in the bloc and real household incomes have gone down by about 3.5 percent since the referendum.

Despite the improving global economic outlook in 2017, the UK was performing at the bottom of the G7 by late 2017 – this continued into 2018. In October 2018, the OBR reported that the UK was at the bottom of the G7 growth league table (see Figure 4.15).

Figure 4.15: UK GDP growth vs G7 (2015-2018)

The OBR estimated in its March 2021 economic forecast that:

“The new trading relationship between the UK and EU, as set out in the ‘Trade and Cooperation Agreement’ (TCA) that came into effect on 1 January 2021, will reduce long-run productivity by 4 per cent relative to remaining in the EU. We estimate that around two-fifths of the 4% impact (i.e. 1.6% ) had already occurred by the time the TCA came into force, as a result of uncertainty weighing on investment and capital deepening.

Both exports and imports will be around 15% lower in the long run than if the UK had remained in the EU.”

“New trade deals with non-EU countries will not have a material impact, and any effect will be gradual.

The Government’s new post-Brexit migration regime will reduce net inward migration to the UK. We assume that these changes will lower the future size of the population and also reduce the labour market participation rate by a small amount.”

The main factor behind the trade impact is new non-tariff barriers to trade with the EU. Leading economists, such as Adam Posen, identify non-tariff barriers and labour shortages as key drivers of current UK inflation.

If we apply the OBR’s 4% estimate to 2018 GDP, the long-run loss of GDP will be around £89 billion per year – say £90 billion in round figures.

In March 2022, the OBR said that it had no reason to revise these estimates of the Brexit impact. In May 2022, the Bank of England said the same.  However, they are long-term and subject to uncertainty. Both OBR and BoE believe that the UK economy will take a long time to adjust to the negative effect of Brexit on trade.

Source: OBR, Brexit analysis, February 2022

By Q1 2022, the UK economy had recovered to just above its pre-pandemic level in Q4 2019 (see Figure 4.16) from the Office of Budget Responsibility (OBR) Economic and Fiscal Outlook in March 2022.  However, the OBR’s medium-term forecast reflects long-run damage from Covid of a further 2% reduction in GDP.

Figure 4.16: Real GDP 2018 – 2027

Compared to G7 counterparts, UK GDP growth had moved to the middle of the pack by Q1 2022 (see Figure 4.17) from the House of Commons Library. However, the IMF’s forecast for 2023 puts the UK at the bottom of the G7 again (see section on Global Outlook above).

Comparing our recent overall trade performance with other advanced economies suggests that the UK saw a similar collapse in exports as other countries at the start of the pandemic but has since missed out on much of the recovery in global trade.

The recovery in UK trade has also been slow relative to advanced economies as total advanced economy goods exports already exceed pre-pandemic levels by 3 per cent, suggesting that Brexit may have been a factor.

Figure 4.17:  GDP % change Q1 2022 compared to pre-pandemic level

The OBR noted that post-pandemic recovery will be the dominant factor in the short term.

“Since the start of the pandemic, business investment has been weak and has recovered more slowly than other elements of expenditure as high levels of uncertainty have generated hesitancy in committing to longer-term projects.

In the final quarter of 2021, business investment remained over 10 per cent below its pre-pandemic peak. Surveys suggest that supply bottlenecks are also holding back investment and the super-deduction (announced in the March 2021 Budget) appears to be incentivising the bringing forward of businesses investment less than OBR had expected.

The super-deduction and the easing of global supply bottlenecks means OBR still expects historically high growth over 2022. Once the incentive is withdrawn, business investment growth slows sharply. It then picks up again towards the end of the forecast.”

OBR, Economic and Fiscal Outlook, March 2022
House of Commons Library, GDP – International Comparisons: Key Economic Indicators, 12 May 2022
Andrew Bailey, BoE Governor, at Treasury Select Committee, 16 May 2022


Last updated on 30th August 2023 by Richard Barfield