Potential Economic Consequences of Brexit on British Economy, with a special focus on the Dairy Industry

This essay discusses the potential economic consequences of Brexit on the British economy, with a special focus on the dairy industry. It analyzes the impact of hard Brexit on the currency, inflation, business investment, and the stock market, employment, and level of skilled workers and economic growth. It also uses the theory of demand and supply to illustrate the impact of hard Brexit on the dairy industry.

Running head: ECONOMICS
Potential Economic Consequences of Brexit on British Economy, with a special focus on the
Dairy Industry
Name of the Student:
Name of the University:
Author note:

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Introduction
Brexit is the abbreviation for Britain’s exit from the European Union (EU). On June 23,
2016, around 30 million British citizens voted in the referendum that whether Britain should
leave the EU or not. 51.9% voted for it while 48.1% voted against it (Hobolt 2016). Hence, it
was decided that Britain would end its 43 years relationship with the EU based on some terms
and conditions. David Cameron stepped down and Theresa May became the new Prime Minister,
who triggered Article 50 of the Lisbon Treaty on 29th March, 2017 to start the exit process
formally. Hence, complete Brexit will happen on 29th March, 2019. The forms of Brexit were
termed as hard and soft Brexit. Hard Brexit refers to the terms of not only leaving the EU, but
also the single market and the Customs Union of EU (Goodwin and Heath 2016). This would
give Britain a full control on its borders, making of new trade deals and applying the legislations
within the territories. On the other hand, soft Brexit will enable Britain to leave the union but
have an access to the single market. It is a matter of debate that whether the UK would adopt the
soft Brexit or hard. Hard Brexit will have more tough impact on all types of industries as it
would lose the access to the free market of the EU (Lawless and Morgenroth 2016). This essay
will focus on the consequences of hard Brexit on the British economy in general and emphasize
on the dairy industries, as it contains many international companies. Appropriate economic
theories and models will be used to illustrate the discussion.
Discussion
The referendum on Brexit and its outcome was a revolutionary event in the history of the
Great Britain and the European Union. Although the final impact on the UK economy is yet to be
affected, but in the past two years of ongoing Brexit process, there have been mixed impact on

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the economy. However, Giles (2018) writes on the two year anniversary of the referendum that
the decision of Brexit has negative impacts on the economy as the pound became weaker and
that squeezed the household incomes. The level of investment fell significantly due to
uncertainty in the business world. It was found that in the first quarter of 2018, the economy was
1.2% smaller than what it would have been without the Brexit vote. This indicates a hit of £24
billion to the economy, which amounts to £450 million a week or £870 per household per year.
And this value is increasing as the final exit date is approaching, as in December 2017, the
amount was £350 million a week (Giles 2018).
Figure 1: Growth of the UK and the EU before and after referendum
(Source: Giles 2018)
The specific impacts on the economy had hit the currency, inflation, business investment
and the stock market, employment and level of skilled workers and economic growth the most.
The first shock was on the currency. As soon as the result of the referendum was announced, the

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pound fell 10%, quite dramatically against dollar to a 31 year low, and hit $1.33 (Morrison
2018). The assumption of a hard Brexit did not get welcome from the economy and the currency
never improved. In January 2017, the currency was around $1.21 after the hard Brexit was
announced (Chu 2018). However, the currency improved slightly in the next few months due to
weakness of the dollar and not for the strength of the pound.
According to the OECD data, the UK has always has higher inflation than the EU region
since 2011. This was accompanied by higher growth in the UK. However, after the Brexit
referendum, the inflation remained higher but the growth in the economy was lower. Hence, the
impact of inflation was hard (Papadia 2018).
Figure 2: Consumer price inflation in the UK and the euro area. Q1 2011 – Q1 2018
(Source: Papadia 2018).

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Hard Brexit and consequent weak currency are pushing the cost of foreign holidays and
other investments in the global market higher and in turn the cost of living in the UK has been
increasing too. The production cost has increased due to higher cost of imports and the burden is
being shifted to the customers. Hence, the prices of goods and services have gone up to 3% from
0.5% resulting in higher cost of living (Chu 2018). The average wage was not increased in
comparison to the inflation. However, the unemployment rate was lowest since 1975 and wages
are increasing, which is again putting pressure on the inflation. It was also found that, there was a
significant shortage in the supply of skilled workers in the economy, especially in the
construction sector. As the free movement of labor will cease after Brexit, the supply shortage
will become more intense in the future and affect the productivity and quality of production.
The UK economy is benefitted from the investments from foreign firms. Due to fall in
pound, the level of investment has lowered as the return from the pound has lowered too. The
anticipation of hard Brexit also affected the business investment and consequent economic
growth. The companies that have invested in the foreign business, have gained more due to fall
in the pound, exports have increased and imports have reduced due to higher price. The
anticipation of hard Brexit also created uncertainty in the economy, leading to a fall in the
vestment and thereby affecting the overall economic growth (Dhingra et al. 2016).
Dairy sector is a significant contributor in the UK economy. It is one of the largest
producers of the country. According to the Dairy Industry of the UK, there are around 13000
dairy farmers, supplying almost 14 billion litres of milk per year, worth of £8.8 billion
(dairyuk.org 2018). It is the single largest agricultural sector in the UK. However, it is seen that
the value of the exported milk products is much lower than the imported milk products. In 2012,
the trade deficit in the dairy industry was £1.5 million (viva.org.uk 2018). According to a report

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by LSE, there is dilemma in the dairy sector due to the news of hard Brexit, and the possible
outcomes include reduction of dairy products imports, resulting in the shortage of the dairy
staples, and specialty cheeses, increasing price of raw materials resulting in the rising price of
domestic dairy production. Thus, there will be shortage of supply in the domestic market due to
costly imports and limited domestic production capacity, and this will make the dairy products a
luxury in the UK economy. This observation was supported by O'Carroll (2018) in her report
that due to slightest delay in the journey of the products from the farms to the table, the prices of
the everyday dairy staples will rise significantly and make those luxuries. For example, a seven
minute delay at the port would cost extra of minimum £111 per container due to extra labor cost.
Hard Brexit implies imposition of the trade rules and regulations of the world trade organization
on the British economy. Loss of access to the free trade in the single market will increase the
price of the dairy imports. Moreover, the small cheese producers of Italy and France might find
the UK market uncompetitive and hence, the supply would be reduced and price would be
increased (O’Carroll 2018). It was also observed that in the long run, Brexit might have a
positive impact on the domestic dairy industry as the competiveness of the producers will
increase and the opportunities will expand, but in the short and medium term, the sudden
expansion of the production capacity cannot be increased, and hence, lack of supply of dairy
products will result in price hike.
The kite consulting report on the UK dairy industry shows that with a possibility of weak
pound and hard Brexit, the inflation would lead to poor performance, higher production cost will
lead to higher dairy product prices, there would be expected tariff of about 10% on the exports
and imports as per the WTO rules, and export opportunities would be less (kiteconsulting.com

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S1
DExcess demand
P*
Q*
P1
P2
Q1Q2
E
E1
E2
E3
Price
hike due
to
supply
shortage
Quantity of dairy
Price of dairy S2
Fall in supply
2018). As per the LSE report, UK has the second biggest trade deficit in dairy, which is up to
16% as 98% of the dairy imports come from the EU (arlafoods.co.uk. 2018).
The impact of hard Brexit on the dairy sector can be illustrated by the theory of demand
and supply and impact of tariff and price rise on the demand and supply. As per the law of
demand and supply, price rise of a product or service leads to fall in demand and rise in supply.
On the other hand, shortage of supply increases the price of a product, which results in the
decline of the demand (Cowell 2018). Thus, a shortage in the supply of the dairy products due to
Brexit leads to rise in the price of dairy products in the UK market.
Figure 3: Demand and supply in the dairy industry and impact of hard Brexit
(Source: Author)

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It can be seen from the above diagram that, the initial demand and supply curves for dairy
sector in the UK is D and S1 respectively. The equilibrium was at E, with price P* and quantity
Q*. due to hard Brexit, UK loses the supply of the EU as many foreign suppliers will be out of
the market. Hence, the supply of dairy products falls. Since, the fall in supply is attributed to
other factors than the price; there is a shift in the supply curve. The supply curve shifts to the left
to S2. Due to this movement of the supply curve, the equilibrium price rises to P2 from P*. The
equilibrium quantity is also reduced to Q2. However, demand remains same. Thus, there is
excess demand in the market. As per the diagram, when the quantity supplied is Q2, the
demanded quantity isQ3. The potential market price would be P1 with the initial supply curve,
but as the supply curve of dairy products has shifted upwards due to the reasons like hard Brexit,
foreign farms going out of the market, imports of dairy becoming costlier, the price of the limited
quantity of dairy product supply in the domestic market of the UK goes very high, that is, at P2.
Moreover, imposition of tariff and fall in the exchange rate also increases the price of
imports and reduces the price of exports, thereby reducing the profits of the dairy sector. Fall in
the currency and exchange rate automatically raises the overall price level in the economy,
resulting in the inflation occurring in the nation. Moreover, due to hard Brexit, there is
imposition of tariff on the imports and exports, resulting in fall in the imports from the EU and
that contribute in the supply shortage in the economy and price hike of the dairy products.
Conclusion
It can be concluded from the above discussion that hard Brexit has negative influence on
the economy of the UK including on the dairy sector. The dairy sector is one of the largest
agricultural sectors in the UK, but it requires imports from the EU region to meet the demand for

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dairy products, especially that for the specialized cheeses. Potential hard Brexit has negative
impacts on the economy in terms of fall in the currency value, inflation, fall in exchange rate,
imposition of tariffs on the exports and imports. In case of dairy sector, the hard Brexit affects
the supply of dairy products in the economy as UK will not have access to the single market of
the EU and there will be tariffs as per the rules of the WTO. Thus, these new rules will reduce
the number of foreign dairy farms operating in the UK market and also the amount of imports.
Hence, this will raise the price of the limited dairy products available in the market. In the long
run, the domestic dairy sector may be competitive, but in the near future, hard Brexit will affect
the dairy sector of the UK negatively.

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References
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