Improved Trade Balance with the European Union Raises Challenging Brexit Questions

Main points

• In 2015 and 2016, the overall trade balance was in deficit by £30 billion and £33billion, respectively. In 2017 and 2018, the deficit was slightly smaller, at £26 billion and £28 billion, with a fall to under £21 billion in 2019.
• In 2020, the year of Brexit and Covid-19, there was a surplus of £3 billion, and in the first eleven months of 2021 a deficit re-emerged, running at an annual rate of £21 billion. In 2020 and 2021 taken together, the trade balance looks likely to average a deficit of £10 billion a year, compared with a deficit three times as large before Brexit.

A plausible reason for these developments is that the Brexit vote led to a sharp sterling depreciation, making the UK significantly more competitive while crimping domestic demand. However, Covid-19 and a dramatic drop in the EU’s overall trade balance are also likely important influences.

This is a preview from the Quarterly UK Economic Outlook, February 2022

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