Saturday, October 29, 2016

Brexit vote and weak pound hits prices

The fallout from a weak pound is beginning to hit consumers with price rises starting to be reflected in familiar brands and high street products.

The right-wing Brexit leaning press have predictably called the price-hikes cynical. But companies and manufacturers say they cannot swallow the increased costs any longer.

Tea prices set to soar

For Somnath Saha, the chief executive of Typhoo Tea, the economics are simple and brutal. Typhoo Tea produces 125 million tea bags a week at its factory in Moreton, Wirral, which have just one ingredient - tea leaves, and they are imported.

Black tea is a global commodity. But like oil and many other commodities it is traded in dollars. Following the fall in sterling since the EU referendum, costs have soared for this renowned brand as 95% of its sales are in the UK.

"This is an absolute disaster for a company the size of ours," says Saha. "The very sharp fall in the pound means the impact is at least a quarter of a million pounds a month for us. This is having a very negative impact on our business and we are really suffering. It's now come to a point where it's not sustainable for us." [BBC]

Tea is not the only product that is increasing in price. Other well known brands have also seen price hikes. In the last week of October The Grocer magazine reported that Morrisons were charging £2.64 for a 250g jar of Marmite, an increase of 12.5%.

Prices for the same product varied at other supermarkets. According to supermarket websites, a 250g pot of Marmite cost £2.64 at Morrisons, £2.50 at Sainsbury's, £2.35 at both Waitrose and Tesco and was on special at Asda for £2.

Earlier in the month Tesco was embroiled in a row with Unilever over pricing. The dispute was soon resolved, but was exploited by the tabloid press who accused companies like Unilever of taking advantage of consumers and using the weak pound and Brexit as an excuse for price rises [BBC / Telegraph / Daily Mail].

The spat between Unilever, which produces some 3000 household products, has been dubbed Marmitegate and spawned many jokes often parodying the 'Marmite you either love it or hate it' catch phrase and replacing Marmite with Brexit.

But for consumers and shoppers it is no joke. The Grocer reported that both Tesco and Asda have raised prices on a number of Unilever products, and Morrisons has also increased the prices of other items made by the company.

Distribution costs rise

Britain imports a vast majority of products or the ingredients from which things are made and the weak pound is driving prices up. Even domestically produced items aren't immune since fuel prices will drive up distribution costs.

British motorists last month faced the highest road fuel costs this year as global oil prices continued to creep higher from historic lows. And with sterling now 18% lower the forecourt prices are steadily rising.

Rising prices for clothes, hotel rooms and petrol have led to the highest rate of inflation in nearly two years, official figures show. Inflation rose to 1.0% in September, up from 0.6% in August, the Office for National Statistics (ONS) said. Clothing saw its biggest price rise since 2010 and fuel, which was falling a year ago, was also more expensive [BBC].

Fuel prices and a weak pound has also affected airlines with some seeing profits drop significantly [BBC]. Airline group IAG, the owner of British Airways and Iberia, said the fall in the value of sterling has cost it €162m [£145m] in the third quarter of the year.

GDP up, but slowing

Brexit supporters still remain positive in the face of such increases and claim the the weak pound is good for exports. Britain's economy indeed appear to shrug off the uncertainty surrounding June's referendum vote to leave the European Union and maintained the best performance among the world's leading economies with growth of 0.5% in the three months since the poll.

However, the figures were marred by a contraction in agriculture, construction and manufacturing that prompted business groups to urge the chancellor, Philip Hammond, to use the autumn statement next month to support measures that boost investment and productivity. In fact, overall, GDP growth slowed from 0.7% in the previous quarter [BBC / Guardian].

It remains to be seen whether growth can be maintained in the coming months. The government has to maintain confidence in a manufacturing industry that fears a so-called hard Brexit which would see increased tariffs. Indeed while current figures are buoyant, a Grocer survey reveals grave misgivings, with some "terrified" by the government's approach.

Secret deals, risks & threats

Indeed it appears the government may be making deals and promises to keep the likes of Nissan on board and stop them fleeing to continental Europe, although No. 10 said there was "no cheque book" on the table [Guardian].

But Prime Minister Theresa May's deal to keep Nissan investing in Britain may well have opened the floodgates to demands from rival car companies chasing their own assurances from the government that they won't be hurt by Brexit [Reuters / Guardian]. The so-called 'sweetheart deal' could make things more complicated or political as Britain wrangles with what type of Brexit it wants [Guardian].

And where might it stop. Already banks are mulling over their position concerning a loss of passporting, which seems more than likely should the PM insist on controls on immigration and limits to free movement, something which is non-negotiable as far as the EU is concerned.

Recent reports suggested that some banks were likely to start shifting before Article 50 was invoked, given the apparent intransigence of the hardline stance of May and her government [Bloomberg].

While some have dismissed the 'threats', there was further concern for British finance after the ratings agency Standard and Poors said Britain's sovereign credit rating remained at risk of a further downgrade because of ongoing uncertainty about the country's future outside the European Union. Furthermore, S&P said Brexit threatened the pound's future as a reserve currency [Reuters / FT].

Of course such predictions will be dismissed by Brexiteers as yet more fearmongering from the Remain camp. However, month by month it is becoming clear that the decision to leave the EU is having negative effects on the economy.

The question is not whether the economy will slow and whether manufacturing will suffer, but how long before those who voted leave wake up from their state of denial and realise that a vote for Brexit was a vote for economic suicide and has allowed the Tory party to seize control with little or no challenge to its leadership.

tvnewswatch, London

Monday, October 17, 2016

Will UK be the sick man of Europe again?

Brexit supporters have, since the EU referendum, maintained that all the fear-mongering by the Remain camp was exaggerated and point to the rise in the FTSE as proof Britain is still doing well.

The 16% fall in the pound since the EU referendum, now worth only $1.21 (16/10/16), is also dismissed by Brexit supporters. Some advocates of Brexit say the currency was overvalued anyway while suggesting that Britain will be able to take advantage of more competitively priced exports.

But both the high FTSE and low pound are being misread by Brexiteers. Most are ignoring the economic repercussions since the Brexit vote and insist the UK government should follow through with plans to pull Britain out of the EU. But doing so could have disastrous effects on the UK economy and might return Britain to becoming the poor man of Europe once again.

FTSE is not a barometer

The FTSE 100 is not a barometer of the UK economy as many might think. Britain's blue chip stock market index is dominated by international groups that have chosen to list their shares in London, but who carry out the vast bulk of their business abroad.

This means they earn their money in other currencies such as dollars and euros. Indeed more than two thirds of all earning by FTSE 100 companies come from overseas.

Thus their sterling-denominated shares have at least kept their price and, in many cases, have risen.

This includes Unilever which were, in the last week, involved in a very public spat with the supermarket chain Tesco over price hikes [Guardian]. The Anglo-Dutch company is the third biggest company in the FTSE 100. Its 11% share price rise since the referendum has been a significant part of that rise in the FTSE which Brexiteers are so keen to boast about.

Repercussions of a weak pound

But now Unilever has acted to try to maintain the value of its income from the UK as the pound is falling. And the Brexiteers are crying foul while ignoring the fact that a weak pound is likely affecting Unilever's operating costs.

Its UK factories are undoubtedly facing higher costs as result of the falling pound. But even if they were not, the fact remains that every pound it earns in the UK is now worth less.

Brexiteers cannot hail the rise in the FTSE driven by companies with earnings in dollars and euros and, at the same time, attack Unilever for trying to maintain the euro value of its profits in the face of a falling pound.

Unilever is not alone and nor has it acted entirely unreasonably. Overseas suppliers who provide the international products Britons all buy in huge quantities will all be looking for price rises.

That is the reality of business and is one of the many plain facts which Brexiteers chose to ignore throughout the whole referendum campaign.

A further issue many seem to be blissfully ignorant of is the fact that exports might not be more competitively priced when one takes into account the fact that many items 'manufactured' in Britain are simply assembled with a great many components coming from abroad.

Should those components come from Europe, only the weak pound will be taken into account since - while still a member of the EU - there are no additional tariffs. However, for items coming from outside the EU there are extra tariffs to take into account.

There are many manufacturers that still work in Britain. But typically they assemble components made elsewhere. That is true of Britain's car industry, and it is true of JCB, the company David Cameron used to love touting in India and China. In 1979, 96% of a JCB digger was made in the UK. By 2010, that had dropped to 36%.

The picture is similar for other car manufacturers, many of which are foreign owned. According to a 2012 study, about 40% of the components [by value] in a British-made car are sourced domestically.

The British car industry employs nearly 130,000 people and generates more than £10bn a year for the economy. And this is all at risk if firms close up shop and move their manufacturing base to mainland Europe. Japanese firms in particular have already warned they shift operations if tariff free access to the European single market is curbed.

Nissan’s Sunderland factory ships about three-quarters of its cars to the EU. For large exporters such as the motor industry the weakened currency already presents a choice of whether to hold their euro selling prices to increase profits, or reduce them to gain market share. But there are further challenges. “In reality, 50 to 60 per cent of the costs of a manufacturer on average these days are in materials they buy and a large proportion of those come from overseas,” says Tim Lawrence, head of manufacturing at PA Consulting.

A so-called hard Brexit may not prevent access to the European single market, after all other nations outside the EU freely access the single market. However all these countries are affected by, sometimes punitive, tariffs. Not having tariff free access will make British exports far less competitive than is claimed by Brexiteers. Furthermore, foreign markets, both inside and outside Europe will reassess whether British made products are still worth buying.

Higher prices

For Britons at home there will be a growing and stark reality that things will become more expensive. Domestically produced items reliant on imports are certain to rise if the pound remains low and tariffs are put in place. Foreign goods will also rise for the same reasons. But even domestic products not reliant on imports could suffer. In a report published today, it says £11 billion worth of agricultural products the UK sells to the EU each year would be hit with an average tariff of 22.3% [Bloomberg]. This would undoubtedly affect Britain's domestically produced fruit and vegetables, if it can even pick them!

Several British farmers have warned of the effect that curbs on free movement could have on food production. One leading farmer has warned that British vegetables will disappear from supermarket shelves if post-Brexit immigration controls prevent thousands of Eastern Europeans from working in the UK [Sky News]. Others have raised similar concerns saying that the humble British strawberry could be in short supply without migrant workers [BBC].

It is not a new story either. Two years before the referendum farmers were saying they needed more migrant workers to pick crops because Britons did not have the "work ethic" to do it [BBC].

While some suggest the influx of EU, and other, migrants affects the job market figures do not bear this out [Bloomberg].

Further uncertainty to come

With little if any clarity on what sort of Brexit Theresa May wants, uncertainty will continue. Uncertainty will further stifle foreign investment and may dissuade companies from establishing a business in the UK. Others may make plans to up sticks and leave while others may not wait for UK plans to be unveiled and leave before the ship goes down.

The Russian bank VTB has already announced it will shift to mainland Europe and is now running through a decision over whether Paris, Frankfurt or Vienna offers the best options [FT / Independent / Telegraph].

VTB is not the only move. The Swiss stock exchange was last month reportedly eyeing Germany as a new location for its European operation [SWI].

The Chinese owned car maker MG also announced its almost complete pullout from the UK for economic reasons, widely seen as being due to a weak pound as well as concerns of a so-called hard Brexit [BBC]. Nissan, meanwhile has called for compensation from the UK should Brexit affect investments in the UK [Guardian].

Hard Brexit fears

It is a hard Brexit that is most feared by big business. A weak pound combined with increased tariffs into Europe is not at all appealing to manufacturers looking to trade with the EU.

Given Europe remains adamant that there will be no cherry picking and that tariff free access to the single market means accepting free movement, a hard Brexit is seemingly inevitable unless Brexit is abandoned altogether.

Whether one voted for Remain or Leave, one should be pragmatic and realistic. It is painfully clear to anyone who reads the financial press that Brexit will only bring much economic pain. Call it fearmongering but the writing on the wall is clear. Europe has made it clear that there will be no 'a la carte' deal, whilst several members have implicitly stated they would veto any deal that doesn't leave the four freedoms intact. This has prompted Brexiteers to suggest that the only route is for a hard Brexit. 

However, WTO chief Roberto Azevêdo has pointed out any post-Brexit trade talks must start from scratch and only after a complete divorce from the EU. Pascal Lamy former WTO Director General has said it would be a long and bumpy ride. Why? Essentially there are some 162 countries with which the UK would need to renegotiate, which could take up to a decade, if not longer. 

Bear in mind all the UK's current trade deals have been done through the EU and as such the UK has few seasoned negotiators. Of course Britain can reemploy some, but they can do little more than talk unofficially until the divorce papers are signed with the EU. It could thus leave Britain in limbo as many countries would not wish to break internationally agreed rules by breaking WTO agreements and trade with the UK without trade deals having been signed.

A WTO route

Can the UK just go ahead and trade under WTO terms as soon as it leaves the EU? As an article in the FT last June pointed out the UK would have to detach itself from the EU and regularise its position within the WTO before it could sign its own trade agreements, including with the EU. As Roberto Azevêdo, the WTO's director-general, said, there is no precedent for a WTO member extricating itself from an economic union while inside the organisation. The process would not be easy and would likely take years before the UK's WTO position was settled, not least because all other member states would have to agree.

Chief economics commentator at the Financial Times Martin Wolf has suggested the government should be prepared to overturn the referendum. "Nothing has changed my view that the UK is making a huge economic and strategic blunder," Wolf states. "The country is going to be meaner and poorer" and "David Cameron will go down as one of the worst prime ministers in UK history." [FT]

May and the UK government should abandon the folly of Brexit and sell it to the electorate by way of explanation that it is not in the country's best interests. Putting arguments concerning democracy aside, there are fundamental truths that Brexiteers refuse to accept. Thus far many have ignored the experts, and pointed to the fact that the calamities predicted have not happened while failing to acknowledge there has only been a vote thus far.

The pound remains at an all time low and there are already signs that financial companies are not going to take the risk over the loss of passporting. And as a lead article in the FT in September pointed out, there is a 'Significant' Brexit risk for 5,500 UK groups using EU passporting [Guardian].

The cost of all of this could run in billions of pounds. Indeed one leaked government report suggests Brexit could cost up to £66 billion a year [Guardian].

Brexit means Brexit

Brexit means Brexit which means economic suicide. Ignore the experts fine. Go the WTO route. But when the UK is floundering in a decade's time after Japanese industry has dwindled, much of London's services industry has relocated, the NHS struggles with staff shortages and the pound is worth less than a euro it will all be too late. It will even too late to rejoin the EU since Britain's financial standing would probably fall below what is required of a new member state. And even if Britain were to meet the criteria to rejoin, many EU states would probably veto the membership bid - and who would blame them.

Of course, anyone that proclaims that Britain should abandon the folly that is Brexit risks being labelled unpatriotic, undemocratic or worse. Remainers have been labelled Remoaners and this week one Tory MP Christian Holliday suggested an amendment to the Treason Felony Act to include post-Brexit support for EU membership [Guardian]. The suggestion might have been tongue in cheek, but it feeds into the growing abuse Remain voters have been subject to especially in the tabloid press [Daily MailGuardian]. The hate and anger has become violent too. One incident saw one man die after a Remain voter fought with a Leave voter [Daily Mail].

Britain was arguably divided in terms of class and wealth gaps, exacerbated by fears of immigration [Telegraph]. Some have suggested Leave and Remain voters can be differentiated by their brand choice [BBC]. There are also suggestions Leave voters were more likely to be in favour of the death penalty [BBC]. Some differences are far more insulting. But whatever factors came into play the Brexit vote has created further divisions and even split families and friends.

At the end of the day it won't matter which way one voted. Everyone will be suffering the same fate as Britain once again becomes the sick man in Europe. Others have described it rather more colourfully; What Brexit really means is: "We're f***ed."

tvnewswatch, London