A report by The Social Market Foundation

Commissioned by Best for Britain

New local impact analysis shows the North West and Midlands will be severely exposed to a double economic hit from Brexit and coronavirus if the UK exits the Brexit transition period without a deal in place at the end of the year.

The report, entitled ‘Assessing the economic implications of coronavirus and Brexit’, focuses on the impact of ending the Brexit transition period on 31st December 2020 in light of the current public health crisis.

The report examines, in the context of ‘U-shaped’ recovery from a coronavirus induced recession, the economic impact of both a new Free Trade Agreement and leaving the European Union without a trade deal.

It seeks to provide an understanding of which sectors, regions and local areas in the UK will be most exposed to both supply-side shocks.

Key findings

• If the UK leaves the EU without a deal in place on 31st December 2020, the manufacturing, banking, finance and insurance sectors would be severely exposed to a double economic hit from Brexit and coronavirus.
  
• While London and the South of England would be highly exposed to the double economic hit caused by Brexit and coronavirus under an FTA, leaving the EU without a deal in place would create pockets of severe disruption across the country, and particularly in the North West and Midlands regions. 50% of local areas (NUTS3) in the North West are placed in Category 5 (the highest) and a further 40% in Category 4 for their exposure to a double economic hit based on the gross value added of sectors locally.
• Analysis of local area impact based on employment shows there are 66 local areas in the most severe category of impact if the UK leaves the EU without a trade deal at the end of the year. One-sixth of these areas have more than a third of their labour market working in either manufacturing or finance, banking and insurance etc. (the two industries most impacted). Four of the 66 areas have more than 100,000 jobs in these two industries.
• If the UK exits the transition period without a trade deal in place, it is likely that the Government would need to bring about a stimulus package to support specific industries and parts of the country. Given the large increase in government expenditure as a result of coronavirus it is hard to see how the UK could afford another stimulus package in early 2021 without adding to already unprecedented borrowing and potentially testing the patience of gilt buyers.

Executive Summary

Whether the UK ends its Brexit transition period at the end of 2020 with a Free Trade Agreement (FTA) with the EU or fails to agree such a deal, changing the trade relationship with Europe will have a significant negative impact on the UK economy which will simultaneously be experiencing the negative impact of the coronavirus crisis.

While there will always be uncertainty associated with the size of the impact of different trade scenarios on the economy, the direction in the both the short and long run is clear:

• The Government’s proposed deal (FTA): medium-size negative impact on GDP.
• Leaving without a deal in place (WTO): large negative impact on GDP.

Coronavirus exposure

The third chapter of this report focuses on the economic impact of coronavirus on the different sectors of the UK economy and on the regions and local areas of the UK. Our analysis of the impact of the coronavirus shows that over the next three years a range of sectors will be negatively impacted by the coronavirus crisis and subsequent recession.

In broad industry terms ‘Finance, Banking and Insurance etc.’ and ‘Construction’ are likely to be severely impacted.

• Manufacturing which accounts for 10% of UK Gross Value Added faces a medium
  negative impact from coronavirus
• Finance, banking and insurance etc. faces a severe negative hit from coronavirus.
  This sector accounts for 33% of UK GVA.

Using this sectoral analysis, we analyse regions and local areas by how their economic activity and employment relies on the different sectors. Enabling us to identify the regions and places that will face the greatest proportional economic harm from the coronavirus crisis.

• London is likely to face the biggest coronavirus-induced underperformance as the majority (86% or £192.8 billion) of its total GVA is from sectors facing medium or highly-negative impacts.
• Wales and Scotland will be least affected as almost a third (31% and 30% or £20.2 billion and £42.4 billion respectively) of their total output is reliant on sectors least severely impacted by the coronavirus.

Analysing coronavirus impacts at the level of NUTS3 units, we find that the local places most severely affected by the coronavirus – because they rely most heavily on the most exposed sectors – are found not just in London but also in the South East and North West of England.

We also show how reliant local employment levels are on the industries most severely impacted by coronavirus.

• There are 3.2 million (72%) London jobs in industries facing the greatest impact from coronavirus.
• By comparison there are 859,000 jobs (62%) in Wales in the highest impact industries, making Wales the least at-risk region. Public sector employment protects around a third (33%) of the workforce across all regions.

Brexit and coronavirus double-impact analysis

Using our sectoral analysis of regions’ exposure to the impact of coronavirus, we assess the joint impact of Brexit and the coronavirus on a regional basis. If the UK fails to negotiate a deal with the European Union, the North West, West Midlands and East of England are likely to face a disproportionately severe double impact from the changing relationship between the UK and the EU and the coronavirus pandemic, due to the sectors that contribute most to their economic activity.

Under the FTA Brexit scenario, the five English regions most affected by the double impact of coronavirus and Brexit are the South East, East of England, West Midlands, North West and North East.

The impact under coronavirus and either scenario for the future trading relationship between the UK and EU have been categorised into five quintiles of severity, with one representing the mildest harm and five the most severe.

In the first instance, this is based on the industrial composition of local GVA. If an FTA is secured, the double-impact of this agreement and coronavirus would be most severely felt in parts of London and the South of England. The North West and West Midlands are the only two regions with areas ranked into the third category of impact due to their reliance on industries such as distribution, hotels and restaurants and manufacturing.

If a deal is not secured, and trade becomes subject to WTO terms, the economic impact is likely to be more severe. There are 70 areas ranked in the top quintile of impact under ending the transition period without a deal and coronavirus.

• 76% of areas in London are in Category 5, the highest double-impact. The double impact is not exclusive to London and the South, 50% of areas in the North West of England are in Category 5.
• 11 areas in Category 5 have more than 50% of their GVA coming from manufacturing and finance, banking and insurance etc. Four of these are in the North West and three are in London.

List of areas in Q5 of coronavirus and WTO analysis with more than 50% of GVA from manufacturing, finance, banking, insurance etc.

Source: SMF analysis

Ending the transition period on 31st December 2020 will not only impact GVA but also employment. Based on the same weighted industrial impact rankings we can create quintiles of impact, using the same methodology as above but with job composition rather than GVA (unfortunately, this analysis excludes Northern Ireland due to data availability). Again, it is clear to see that the severity of impact is highest in the scenario where the UK fails to negotiate a deal with the EU. One sixth of the areas in Category 5 (11 out of 66) have more than a third of their labour market working in either manufacturing or finance, banking and insurance etc. Across the 66 areas facing the most severe double impact 3.9 million are employed in the two industries facing the hardest impact. Four of the 66 areas have more than 100,000 jobs in these two industries.

Areas in quintile 5 of coronavirus and WTO impact with more than 100,000 jobs in manufacturing, finance, banking and insurance etc.

Source: SMF analysis

The last recession in the UK has shown us that some areas are more resilient to economic downturns and are able to recover more quickly which is an important consideration when focusing on the double impact of ending the transition period and the coronavirus pandemic.

Given the large increase in government expenditure as a result of coronavirus it is hard to see how the Government could afford another stimulus package in early 2021 due to failing to secure a deal without adding to already unprecedented borrowing and potentially testing the patience of gilt buyers.

Coronavirus has bought with it a need for more workers in certain industries, often ones which are reliant on labour from the EU and who do not meet the minimum income thresholds, such as social care. There is a risk that these sectors could face workforce shortages in 2021. 

About the report

'Assessing the economic implications of coronavirus and Brexit' is a Social Market Foundation (SMF) report by Kathryn Petrie and Amy Norman with a foreword by James Kirkup. You can find a methodological note for the report here. And read the whole report (PDF) here.

The SMF report was commissioned by cross-party group Best For Britain. The SMF retained full editorial independence. The SMF, a registered charity, is committed to disclosing all its sources of funding.