Persistent outflow of migrants could weaken UK's economy, Moody’s says

The number of foreign-born workers in the country fell by about 13.7% last year, ONS data showed

Commuters walk along London Bridge in the UK's capital. The country witnessed a steep decline in net migration last year and a sustained outflow could could lead to labour shortages, ratings agency MoShow more

A large outflow of migrants from the UK last year will help to keep unemployment in check in the short term, but could weaken the economy if sustained, ratings agency Moody’s Investors Service said.

The number of foreign-born workers in the UK fell by about 795,000 last year – a 13.7 per cent annual decline, the Office for National Statistics’ Labour Force Survey showed.

Although there is some uncertainty over the accuracy of data gathered in the midst of a pandemic, “it is clear that there has been a sizeable outflow of non-residents, likely driven by a combination of the coronavirus-induced shock and Brexit”, Moody’s said in a report.

The departure of large numbers of foreign workers, coupled with the government stimulus measures such as furlough schemes, is helping to keep unemployment in check, despite the significant hit to the economy as a result of Covid-19. The unemployment rate fell to 4.8 per cent in March, from 4.9 per cent in February, the Office for National Statistics said on Tuesday.

This is despite the UK economy shrinking by a further 1.5 per cent in the first quarter, on top of a 9.5 per cent contraction last year, official figures show.

However, if the outflow is sustained in the long term it could present challenges, with shortages of workers expected in industries such as construction, healthcare and hospitality.

Work-related immigration flows from the EU had already been declining since the 2016 Brexit referendum, which has only partially been offset by an inflow from workers outside the EU. The Bank of England is also forecasting a strong recovery this year, with annual gross domestic product growth of 7.25 per cent.

"If migration outflows are sustained, we expect to see labour shortages emerge across sectors such as transport and health and social care,” Evan Wohlmann, senior credit officer at Moody's Investors Service, said.

"Sustained net emigration would also weigh on UK growth potential by further slowing growth in the labour force and intensifying the impact of population ageing."

Foreign-born workers are more likely to be younger, with 80 per cent of them of working age, compared to 60 per cent of the overall population. They have supported economic growth, adding 0.4 percentage points on average to the UK's potential output growth between 2004 and 2018, Moody's said, citing figures from the UK's Office for Budget Responsibility.

The ratings agency estimates that if net migration flows from the EU remain at half of their recent historic levels between now and 2028, this could shave 0.1 per cent off the UK's potential growth rate.

Migration outflows are also likely to be detrimental to national and government finances.

"Net migration of working age individuals has tended to have an overall positive impact on the UK's public finances, raising revenue proportionately more than spending," the Moody's report said.

European Economic Area and Swiss nationals paid £20.7 billion ($29.36bn) more income tax and national insurance than they received in tax credits and child benefits in 2017 and 2018, figures from Her Majesty's Revenue and Customs showed. Non-EEA and Swiss nationals paid £17.8bn more than they received.

Outflows are therefore likely to reduce this taxable income and will mean local authorities witness a contraction in the council tax base, the ratings agency said.