From the Desk

This week, 10 years ago, the U.K. voted to leave the E.U. The Brexit result was a shock. Polls hadn’t predicted it, leaving the winning side as surprised as the losers. Those who sponsored the breakup promised a more vibrant economy. An economy that would, when uncoupled from E.U. regulators, unleash innovation galore.

Did that happen? The simple economic answer is no.

U.K. growth has been lower than in most G7 peers. Some of the more diligent tracking indicates the U.K. economy is 6 to 8% smaller than if it had remained. The expectation was that, free of E.U. regulations, the U.K. would cut more lucrative trade deals everywhere else. That hasn’t happened.

A tenet of economics is that countries tend to trade mostly with their neighbors. The E.U. is still crucial to the U.K. for exports and imports but now comes with lots of paperwork for both sides. Large firms can cope with the burden. But smaller ones can’t, to the point where a material number of small businesses have scaled back their E.U. business or dropped it entirely. Manufacturing has lost out while services have gained. However, the services growth has come from industries with fewer trade barriers.

In an odd turn, the U.K. has not internally overhauled some E.U. regulations. For example, those dictating and restricting U.K. working hours remain in place. While politicians ridiculed these during the Brexit vote, they have left these regulations unchanged, suggesting these are more popular than expected.

The broader lesson is that traditional economists were right. They warned that erecting barriers to trade and competition would hamper growth. It has, and investment has shrunk and dragged down productivity and real wages. On the political front, 57% of Britons tell YouGov pollsters the Brexit was a mistake.

The good news is that the relationship between the U.K. and the E.U. is warming. And other countries within the E.U., that may have contemplated a breakup, no longer do after seeing the Brexit scorecard. It’s a modern-day study that politicians and voters may avoid some mishaps by paying more attention to conventional economic analysis. 

Sources: Bloomberg, YouGov, The Financial Times, 2026.

As Randall Malcolm noted in last week’s From the Desk, the FTSE Canada Universe Bond Index is almost unrecognizable when compared to the index of 2020, with a meaningful increase in the allocation of federal bonds at the expense of the provincial and corporate allocations.

This evolution matters for pension plans and insurers using index-based strategies to hedge liabilities. For actively managed core or core-plus mandates, managers typically retain flexibility to overweight credit, meaning benchmark changes do not automatically translate into reduced spread exposure or a weaker hedge of credit-sensitive liabilities.

However, the implications are more pronounced for passive strategies. By construction, these portfolios closely track the benchmark and therefore inherit its structural shift toward federal exposure and away from credit. This can create a growing mismatch for investors whose liabilities embed credit spread risk.

In this context, liability-aware investors should reassess whether passive index-based mandates continue to meet their original hedging objectives.

Source: Bloomberg, 2026.

To view last week’s From the Desk, click here.