Brexodus: What It Is and Its Effects on the British Economy

Brexodus, a compound word made up of the words "Britain" and "exit," refers to the prediction that the U.K.'s exit from the European Union (EU) would lead numerous individuals and corporations to leave the U.K.

Understanding Brexodus

The U.K. voted to leave the EU in a 2016 referendum. Four years later, the U.K. officially separated.

On Jan. 1, 2021, the U.K.-EU Trade and Cooperation Agreement (TCA) went into effect. The TCA allows trade of goods between the U.K. and EU to continue without tariffs and quotas. However, it didn't prevent the introduction of costly red tape and border controls, and left unsettled issues related to financial services, standards for goods, and the establishment of a regulatory “level playing field.” While the TCA prevented a no-deal Brexit, the worst potential outcome, it involved substantial changes for U.K. and EU businesses and individuals.

Thus far, two of the biggest Brexit-related challenges have been labor shortages and higher trading costs for U.K. companies doing business with the EU.

Brexit is having profound effects, but its long-term impact remains uncertain.

Brexodus for Individuals

Brexodus for individuals refers to the trend of people, particularly skilled workers and academics, leaving the U.K. due to uncertainties and changes following Brexit. This would have significant implications for the U.K.'s economy and society.

Shortly before the U.K. voted to leave the European Union, EU citizens accounted for 59% to 77% of estimated net migration. Unsurprisingly, those numbers have since changed.

Until January 2021, EU citizens were still free to move to the U.K. However, data shows that EU net migration has been in decline since immediately after the referendum. Some pundits believe that is the result of EU citizens feeling unwanted. However, other factors, such as a weaker U.K. currency and economic recovery in southern European countries, could also have contributed to this change.

In 2022, more EU nationals left the U.K. (202,000) than arrived (151,000), although overall net migration into the U.K. is on the rise, according to the Office for National Statistics (ONS). According to the ONS, 1.2 million people migrated into the U.K. in 2022, and 557,000 people emigrated from it, resulting in a net migration figure of 606,000.

Still, Brexit has led to a shortage of workers. Two years after the new freedom-of-movement restrictions were put into force, Jonathan Portes, a senior fellow at U.K. in a Changing Europe, an academic network that conducts research on Brexit; and John Springford, deputy director at the Centre for European Reform think tank, analyzed Brexit's impact on the U.K. labor market. By September 2022, Brexit had contributed to a net loss of around 330,000 workers, which represents about 1% of the U.K. labor force, according to their research, which was published in January 2023.

BNP Paribas agreed that Brexit led to a smaller pool of foreign labor. In the first quarter of 2023, the bank estimated that 76,000 fewer foreign workers were employed in the U.K. than would have been if Brexit had not happened.

The workforces in various industries have been affected differently. Portes and Springford found significant shortfalls in workers from the EU in less-skilled industries that are crucial to the economy, including transportation and storage, wholesale and retail, accommodation and food, manufacturing, and construction.

Meanwhile, higher-skilled sectors, such as healthcare and education, don't appear to have been as badly affected. For instance, the Bank of England in 2022 expressed less concern over the Brexodus of banker jobs, despite financial firms losing the privilege of full access to the EU market. This indicated a shift in perspective about the impact of Brexit on the financial sector.

There is no doubt Brexit has affected and will continue to affect individuals changing residences and traveling between the EU and the U.K. for business or pleasure. U.K. travelers to the EU, and vice versa, are subject to new rules due to Brexit. This includes the need for an electronic travel authorization for U.K. citizens visiting Europe.

Additionally, both U.K. and EU travelers may face additional border checks resulting in longer wait times. This has added a new layer of consideration for individuals planning travels between these regions.

Brexodus for Businesses

Brexit's effect on immigration also challenges companies’ operations and their ability to recruit staff from neighboring countries, in addition to the significant burdens it already imposes on trade in goods.

Many international firms had London headquarters for their EU clients because of "passporting" arrangements, which allowed them to operate across the bloc without setting up local subsidiaries. With Brexit, these arrangements have ended, leading to threats of an exodus of operations, assets, and job opportunities.

Sectors that were expected to be worst hit included financial services, automotive, agriculture, food and drink, chemicals, and plastics.

Financial services

The U.K. officially left the EU at the end of 2020, putting an end to the transition period. Although a free trade agreement was established between the U.K. and EU, it didn't specifically address financial services, a critical part of the U.K. economy. The now-terminated EU single-market directives passport right for firms can only be reinstated if the EU grants equivalence to the U.K.

Major banks, including JPMorgan, Morgan Stanley, NatWest, Goldman Sachs, Bank of America, UBS, and Credit Suisse, moved hundreds of employees and large quantities of assets from London to other European cities before the deadline for a trade deal. London-based insurers also set up EU locations, including Lloyd’s of London in Brussels and Aviva in Ireland.

The financial industry, including trading activity, has been directly affected by Brexit, leading to regulatory shifts and changes in cross-border trade dynamics. London lost substantial stock trading activity to Amsterdam because the EU now requires EU companies’ stock to be traded within the union.

London has lost additional business due to the fact that derivatives priced in euros must be settled within the EU. Generally, commentators expect London to continue as a major global financial center, but acknowledge its dominance may decline as some activities shift abroad. The impact of Brexit on the U.K. financial services sector has been less severe than expected. However, it is still relatively early days.

Other industries

When the U.K. left the single market and customs union in 2021, its many companies trading with neighboring Europe suddenly faced new rules, paperwork, and checks. The outlook was grim for many sectors.

Exports to the EU in 2022 were below 2019 figures when adjusted for inflation, but didn't fall off a cliff as some pundits had predicted. However, it’s widely agreed that trade would have grown if the U.K. hadn’t left the EU.

Jun Du, a professor of economics at Aston Business School in Birmingham, England, estimates that new barriers to trade, which have added costs and lengthened the time it takes for goods to arrive, have led exports to the bloc to be 26% less than they would have been, according to The Financial Times. Du said that smaller companies have been hit the hardest.

There have also been arguments that Brexit has lowered business investment in the U.K. In July 2023, the Centre for Economic Policy Research said that business investment could be about 10% less than it would have been without Brexit. And companies continue to be worried about Brexit. In March 2023, BNP Paribas reported that one of four U.K. companies ranked Brexit as one of its top three concerns.

To date, these challenges haven’t led to the exodus some critics expected. However, most agree that it’s still early and that the economic impact of Brexit will be significant. The Bank of England believes Brexit caused “a long-run downshift in the level of productivity of a bit over 3%." And the Office for Budget Responsibility thinks Brexit has shrunk the British economy by 4%.

The Bottom Line

Brexit has significantly reshaped the British economy, introducing trade barriers and labor shortages that have affected numerous sectors. That said, the ultimate impact remains uncertain as only a few years have passed since the divorce officially happened. It could take several more years to get a clear idea of whether the dire consequences of Brexodus that so many pundits were predicting will come to pass.

As of October 2023, businesses have yet to leave in droves. The biggest Brexodus issue has been labor shortages.