The UK's economy is 5% smaller than it would have been if it had chosen to stay in the European Union, according to an analysis by Goldman Sachs.

It found that leaving the EU had held back economic growth with Brexit hitting the trade in goods, causing weaker business investment and a steep rise in non-EU migrants coming to Britain, who study rather than work.

Analysts at the American investment bank said that “the UK has significantly underperformed other advanced economies since the 2016 EU referendum, with lower growth and higher inflation”. 

It estimated that since 2016, consumer prices had leapt by 31% in Britain. In the United States and the eurozone they had increased by 27% and 24% respectively, it said.

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The investment bank's analysis also underlined that greater trade frictions had raised the cost of goods exchange, putting upward pressure on prices, Goldman said. 

Its experts said their “analysis shows that lower EU immigration has likely played a role in exacerbating labour market tightness and thus contributed to the UK’s higher inflation rates since 2016.

“EU immigrants tended to have high labour market participation rates, as many of them entered the UK specifically to work. By contrast, many recent arrivals are students, meaning that immigration may be playing less of a role in boosting labour supply than the headline numbers suggest.”

The Herald: Scots voted to remain in the European Union. Photo Colin Mearns/The Herald.

Since the vote to leave the EU, the number of European citizens travelling to the UK has plummeted. However, this reduction had been outpaced by a leap in non-EU migration to the UK, taking total net migration in 2022 to a record 745,000. 

Last month the Office for National Statistics said that net migration would contribute to raising the UK population to 74 million by 2036.

Although the change in migration flows had contributed to short-term inflationary pressures, Goldman said that a bigger share of migrants now coming to Britain were highly skilled, which would “have some long-run benefits in terms of boosting productivity”.

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Investment levels since 2016 had been “weak”, Goldman said, thanks to “prolonged uncertainty around the ultimate form of Brexit”. Nevertheless, the bank’s analysts noted that “with this uncertainty now largely resolved, some of the weakness of investment might reverse, consistent with stronger investment in recent quarters”.

Economists have highlighted that the UK's economic growth rate has slowed markedly since the 2008 global financial crisis as a result of meagre productivity improvements. These have been attributed to a slowdown in private and public sector investment.

Last month another analysis found that Brexit is leaving a hole of almost £100bn in annual UK exports, making Britain’s economy worse off than if it had remained in the bloc.

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The study by the Centre for European Reform (CER), a pro-EU think tank, said that businesses that make an array of products including sporting goods, children’s toys, jewellery and medical equipment have struggled the most with border costs imposed by the UK’s decision to leave the EU, leading to 30% less trade between 2020 and 2023 than if Britain had stayed in the trading bloc.

John Springford, an associate fellow at the Centre for European Reform (CER), said at the time his analysis “shows that Brexit is leading to permanent depression to trade between the UK and the EU”.

“If Brexit hadn’t happened, and we can visit the universe where Remain won the referendum, then trade and [the economy] would be significantly higher,” he said.

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Scots voted to remain in the EU by 62% with the SNP promising to return as a member if Scotland becomes independent.

Drew Hendry, the SNP’s economy spokesperson at Westminster, said: “Brexit continues to be a disaster for businesses, ordinary households and our wider economy - and it’s time the main UK parties at Westminster wake up to this reality.

“Every week we see at least one damning report showing the damage Brexit is doing to Scotland and the rest of the UK. 

“So far this week we’ve learned the UK has lost £100 billion in annual exports as a result of Brexit and that it has significantly underperformed other advanced economies since the 2016 EU referendum, with lower growth and higher inflation.

“Yet the Tories, Labour and Lib Dems continue their conspiracy of silence on the damage of Brexit. 
“The SNP is the only main party at Westminster facing reality and speaking up on the havoc of Brexit. It is clear that Scotland needs to rejoin the EU and to do that, become an independent country.

“It's important that Scotland continues to have a strong team of SNP MPs at Westminster, to ensure Scotland’s voice and values are heard. The only way to make that happen is to vote SNP at the next general election.”