by Thomas Cooley, Charlie Nusbaum, and Peter Rupert

It has been almost three years since some of our British friends voted to leave the European Union and forge ahead on their own. Many discussed the potential economic ramifications of leaving the EU leading up to the vote. From immigration to trade to capital investment, Brexit was meant to be disastrous for the Brits. Since the initial vote, much has happened. Theresa May both became Prime Minister and faced a “No Confidence” vote, large scale protests both for and against another referendum have erupted, and May’s Brexit deals have been rejected by the British Parliament on three occasions. Now, the deadline for a No Deal Brexit has been extended to October 31 as talks have broken down and Theresa May has announced that she will step down as Conservative Party leader. Throughout these negotiations and despite its political uncertainty, the United Kingdom kept pace with many of its major European neighbors and has even outperformed over the past 9 months.

Average year-over-year growth among Europe’s largest economies has remained just below the US average of 2.2% since the start of 2016. During the end of 2017 and beginning of 2018, however, growth in France, Germany, and Italy began to decline, reaching 1.1%, 0.7%, and under 0.1%, respectively, for 2019Q1. We have attributed this decline to political uncertainty in previous posts. With early general elections and the rise in the Catalan Independence Movement in Spain, and Brexit looming over the United Kingdom, we would have expected these two to experience a similar slowdown. Instead, however, both have remained largely insulated, with Spanish and UK growth reaching 2.4% and 1.8%, respectively. Both ticked up from 2018Q4.

We can attempt to uncover the affects of Brexit more rigorously by estimating the probability that there has been a break in long-run growth. In the above graph, we use Bayesian methods to estimate this probability and restrict our attention to after the Great Recession. Two empirical facts are immediately evident. First, our regression model estimates a high probability of a change in the long-run growth rate for all countries during the recovery. Second, our regressions indicate that it is very unlikely-almost 0 probability- that long-run growth in these economies has changed since then. The exception to this is Spain, where our model predicts a high probability that a trend break occurred during 2013Q1 due to its persistent rise around this time. Still, Brexit does not show up anywhere in terms of a trend break.

Investors also seem to have confidence that the recent events of Brexit are little to worry about. While an imperfect measure, here we use stock returns as an indicator of market expectations. Several features are apparent. First, there was a large drop in returns leading up to 2016 and again prior to the Brexit vote. Second, returns in the EU have experienced a persistent decline since the start of 2017. Finally, and most notably, large declines in European returns track declines for the Dow Industrial Average quite closely. If Brexit were a first order concern of investors moving forward, we would expect to see sharper movements in European markets than in US markets, particularly in the FTSE 100, around key Brexit deadlines. At most, it seems as though Brexit is already baked into market expectations.

Are the negative effects of Brexit and uncertainty surrounding it hidden elsewhere? Not as far as we can tell. Below is a striking graph of real household consumption growth. Whereas real consumption growth has declined substantially across Europe’s largest economies since 2016, the United kingdom has maintained a year-over-year consumption growth of between 1.6% and 2.0% since initially dropping below 2.0% in 2017Q3. France, Italy, and, until this quarter, Germany saw consumption grow by only around 0.5%. Spain has recently suffered weak consumption growth, falling from 3.0% in 2018Q1 to 1.4% in 2019Q1. Still it remains well above France and Germany.

Moreover, trade has been largely unaffected by the developments surrounding Brexit. In fact, none of the four largest economies- France, Germany, Italy, and the United Kingdom- have seen a change in trading behavior. Exports both to their EU trading partners and the United States have continued their long-term trends since at least 2010, or in the case of the United Kingdom, 2015.

Imports among these economies tell a similar story. One major difference in these pictures is that UK imports of US goods has steadily risen since the beginning of 2018 after remaining largely constant for the three years prior. Still, given that France, Germany, and Italy have seen very little change to their trends in trading behavior, and given that the UK has also seen a large increase in imported goods from the rest of the EU, it is difficult to identify any effects of Brexit.

There is one place where we may- and we stress the word “may”- be beginning to see the effects of Brexit. Since 2018Q1 Germany, France, and Spain have largely maintained average investment growth as measured by fixed capital formation of 2.8%, 2.8%, and 5.2%, respectively, while the United Kingdom has had almost no increases in investment of late. This past quarter, however, UK investment growth risen above the US average of 1.2% to 1.7%.

Final Take

While the largest European economies have seen quite substantial declines in both GDP and household consumption growth, the United Kingdom has remained steady. This is in spite of the uncertainty surrounding their future. It is hard for us to point to a single picture, or collection of pictures, to see Brexit effects. We challenged ourselves to imagine that we did not know when Brexit, and the subsequent political turmoil, occurred and tried to guess when it happened using these data. We couldn’t. Can you?