Will Brexit reduce immigration numbers without denting UK growth and trade prospects?

BREXIT
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The British government is bracing itself for one of the most ruthless and intricate migration exercises ever carried out in the country as European Union nationals struggle to protect their residency rights. Approximately 3.5 to 4 million European Economic Area citizens are expected to apply under the EU Settlement Scheme (30 March 2019).

Many British industries heavily reliant on European labor and already fearing a post-Brexit evaporation of their labor pools say the slowdown in migration is already starting to hurt. The reduction in EU migration is occurring at a time when British attitudes toward immigration are rapidly softening. A new poll by Ipsos-Mori finds that 48 percent of respondents say the U.K. benefits from immigration. Only 25 percent view immigration negatively. The EU workers are finding Britain a less smart selection because of political indecision over Brexit. The declining British pound and expanding economies in their home countries have made U.K. jobs and wages less attractive to EU workers. Officials in industries ranging from retail to hospitality to agriculture to manufacturing argue that they need the inflow of EU workers to do jobs that are tough to fill with local labor. This is especially when the national jobless rate is at 4 percent, which economists regard as complete employment.

However, if May’s Brexit plan eventually passes, it would pull the U.K. out of Europe’s single market and customs union so it would no longer have to abide by the EU’s requirement for the free movement of people. It could then drastically curtail migration from Europe.  Sifting through the noise to really understand what impact Brexit and all the uncertainty that it brings is having on the UK’s trade prospects, it’s possible to see a picture emerging. This seems very appropriate, given that there are a number of factors that, combined, could now usher in the beginning of a collapse of the ecosystem of immigrants which has been one of the few rays of hope in a dilapidated UK economy over the past ten years. What happens in the days, weeks and months to come will determine whether that collapse accelerates.

It is estimated that approximately 20% of staff in London are from the EU, something the core EU principle of free movement of labor has undoubtedly encouraged. The UK government should want to continue to encourage highly skilled workers to come to the UK, and recent pronouncements by ministers confirm this. However, other government commitments to reduce immigration levels to under 100,000 a year alongside lobbying from other sectors that rely heavily on migrant labor such as agriculture, healthcare, and teaching could see other sectors struggle to find the right skills. There is also a perception issue among young EU workers: that the UK is not such a friendly place to live and work. While reports of this are largely anecdotal, perception matters.

UK retailers are also waiting with trepidation to see how Brexit could affect employee numbers, especially since many of their employees come from the EU. The retail industry often seek talent from the EU for both office-level and shop floor roles, the retailers have a valid cause for concern about what the future may hold, especially if the UK crashed out of the EU without a trade deal. UK retail sales in March 2019 have once again been negatively impacted by the ongoing uncertainty surrounding Brexit. Over the three months to March, in-store sales of non-food items declined 1.5 percent on a total basis and 1.7 percent on a like-for-like basis. In the same period, food sales increased 0.2 percent on a like-for-like basis and 1.3 percent on a total basis.

UK investment tracking company Beauhurst monitors venture capital and public funding of start-ups and records that overall funding fell from £8.27 billion in 2017 to £7 billion in 2018. But there has also been a 15% fall in seed stage funding, and this is more worrying. Seed funding for very early stage companies forms the beginning of the overall investment pipeline, and declines here will create shockwaves that will ripple through the UK innovation landscape for years to come. As Beauhurst acknowledge, a significant and sustained drop in seed funding could be the canary in the coal mine for the longer term health of the UK tech scene.

While the overall impact of Brexit on the economy looks likely to be a negative one, it is an opportunity for other EU member states. Financial incentives offered by capitals such as Paris, Berlin, Amsterdam, and Lisbon are proving attractive for businesses considering locations to start a company, or for those looking to relocate from London. We have yet to see large numbers of companies move abroad, but a recent survey of 100 early stage London-based start-ups said they have considered relocating their operations. Ultimately, whether they act on these concerns will depend on whether a Brexit deal is reached or not, and how that plays out in the legal realm. In a sector that is heavily dependent on the collection, manipulation, and commercialization of data, much of it personal, the extent to which the UK adheres to the European GDPR data protection regime will be an important factor. A need to conform to EU data protection rules in order to access European markets could make relocating to an EU member state a much more attractive proposition. It may happen when the UK suddenly loses its appeal as a European hub for innovation and all the job and wealth creation that goes with it.

Brexit may aggravate the gap between London and less economically dynamic parts of the country rather than reduce it. The overall impact of these changes on migration flows and hence the wider economy. Estimates are that this would reduce network-related migration by approximately 50,000 a year and reduce GDP by approximately 1.5 to two percent over 10 years. GDP per capita – average incomes – would also fall, although by considerably less, as the population would be smaller. Both economic theory and evidence suggest that a less open and more restrictive migration policy will have a negative impact on output and productivity.