Wednesday, January 31, 2018

Britain will suffer after Brexit govt report says - but doubters remain

Brexit is less than 14 months away and yet still no post-Brexit transitional arrangement or EU-UK trade deal is even under discussion, let alone agreed.

And hardly a day goes by when another negative headline emerges concerning Britain's post-Brexit future.

Yet the government and the right-wing press continue to claim that Britain will prosper after it leaves the EU.

Bleak outlook

This week a leaked report suggested that any sort of Brexit, hard or soft, would result in an economic hit ranging from a loss of 1 to 8% of GDP.

However, both the Tory party and the pro-Brexit press dismissed the report claiming that it was unfinished.

The paper, entitled EU Exit Analysis — Cross Whitehall Briefing and dated January 2018, looked at three of the most plausible Brexit scenarios. It was obtained by the online news and entertainment company BuzzFeed. The analysis suggests a "no deal" scenario, under which Britain reverts to World Trade Organization rules, would reduce UK economic growth by 8 percentage points over the next 15 years compared with current forecasts.

But even a so-called soft Brexit would result in a lower growth by 2 percentage points.

According to the leaked government analysis Britain will be left worse off under all economic scenarios after Brexit, with financial services, manufacturing and retailing among the industries worst hit [BBC / FT].

However, many more sectors are likely to be hit by Brexit.

Agricultural concerns

Given that farming is a long-term business and its viability is currently governed by the EU's international trade arrangements, UK farmers face much financial risks and uncertainty.

One example of the difficulties ahead concerns the threat to the UK organic cheese Kingdom Cheddar, which is currently exported to the US.

Kingdom is made from organic milk produced by the 265 UK dairy farmers in the Organic Milk Suppliers Co-operative (OMSCo).

In 2015, under US-EU trade arrangements, OMSCo qualified to export its premium organic cheese to the US. It took OMSCo eight years to develop the Kingdom band, it's dairy farmer members having a substantially altered of their farming practices to meet US standards (including using fewer antibiotics and improving animal welfare).

The arrangement of that allows Kingdom to be sold in the US, however, is between the EU and the US. OMSCo pointed out last October that unless an "equivalence" agreement on organic farming standards was signed between the UK and the US by the end of 2017 it would stop production of Kingdom at the end of December.

"We cannot take the risk of producing a niche market product that, given its 18-month a production cycle may not be able to be sold after brexit," OMSCo Chairman Nicholas sapphire said.

There has been no official announcement either from OMSCo or Kingdom Cheese as to whether they have indeed stopped production. Nonetheless the uncertainty remains.

Bleating about Brexit

OMSCo is unique in the UK in exporting a high-volume premium organic cheese to the US; but given agriculture's long production cycle, all UK food exports face the same risk as disruption as the clock ticks down.

And there are concerns in other quarters such as the meat industry.

Last autumn, for instance, UK sheep farmers had to make the difficult decision about whether to retain millions of ewe lambs for breeding or send them for slaughter as fat lambs.

If kept for breeding, most will not be put to the ram until autumn 2018 and so won't give birth to their first lambs until spring 2019 - just as Britain leaves the EU.

About 40% of all UK lamb production is currently exported to the EU so, unless Britain keeps access to the single market, those exports will face an EU sheep meat tariff of £2,689 a tonne. The price UK farmers receive for their animals will collapse

The risks are similar for cattle farmers, with the production cycle of beef animals even longer than that for lamb; and the same applies to arable crops being shown across the UK this autumn. Kept in store many will not be marketed until after the UK leaves the EU.

No one knows yet what individual farmers will decide to do to minimise the risks as Brexit approaches, but one thing seems sure: the UK's food trade deficit will keep growing. It rose by £800m in the three months to July 2017 and now stands at a staggering £34.7bn for the full year.

Dreams and unicorns

Many voters for Brexit continue to talk of sunny uplands following Britain's departure from the EU.

But there has been little if any good news since the referendum. Indeed the very opposite is true.

Almost immediately after the Brexit vote China stocks fell over 1% [Reuters] and the pound plunged to a 31 year low [Independent / Independent ]

Just a day or so later banks began to move some operations out of Britain [FT] as more than $2 trillion was wiped off markets and Moody lowered the UK credit rating [Guardian].

Soon after the S&P slashed the UK's growth forecast [FT].

At the time such predictions were again dismissed by Brexiters. But UK growth is now at its lowest rate in 4 years.

Slowing growth & rising inflation

UK economic growth is now expected to slow even more in the next few months with high inflation, weak consumer confidence and Brexit further discouraging consumer spending [Guardian].

There has been no recession but only a month after the referendum the Bank of England warned that Brexit risks had begun to crystallise [BBC]. Indeed it was only the BoE governor Mark Carney's interventions that mitigated what might otherwise have been a disaster.

But industry has become increasingly worried with many holding back on investment.

In July 2016 Standard Life suspended trading in UK property funds [BBC], Sainsbury's announced the closure of its Netto stores [BBC] and Siemens put its UK wind power plans on hold in response to Brexit [Renewable Energy Magazine].

As the pound continued to stumble prices began to rise and manufacturing slowed.

Dell increased prices [Register] while UK manufacturing as a whole fell sharply [FT].

But in August the BCC cut the UK growth forecast even further [BBC] as the Brexit secretary David Davis suggested that the UK might crash out of the EU without a deal [Guardian].

There was no good news in September either as the OECD halved the UK growth forecast due to EU referendum vote saying that it expected a 1% GDP growth in 2017, down from the 2% forecast it made in June 2016 [Independent]. 

The figure was slightly up on these forecast but were hardly anything to celebrate.

In January 2018 it was reported that the UK was estimated to have grown by 1.8% in 2017, down from 2016's 1.9% rate and the weakest expansion since 2012 [Independent].

Relocations and job losses

As September ended the London Stock Exchange warned that 100,000 jobs in the city were at risk [Guardian]. But of course such predictions were once again dismissed by Brexiters as more 'project fear'.

And while there was no sign of a mass exodus there were signs that some businesses were rethinking their future. MG ended production in the UK and moved to China [BBC] whilst other firms ceased production altogether [BBC].

By the end of the year there was no Christmas cheer. S&P had predicted a hard Brexit and handed out a fresh downgrade for the UK [Guardian].

The Chancellor meanwhile announced that Brexit would blow a £59 billion hole in public finances [Guardian]. And as he gave this grim news news figures emerged which showed that UK manufacturing was slowing [BBC].

Price hikes

Champagne may well have popped as Britain entered 2017 but while fireworks soared into the sky so did the price of everyday commodities on supermarket shelves [Guardian]. Other manufacturers made other changes to keep prices the same, such as Toblorone which became more gappy [Guardian].

The slow exodus continued into the new year as HSBC and UBS each announced the shift of 1,000 jobs from UK in another Brexit blow to London [Reuters].

Meanwhile UK inflation rose to its highest level since June 2014 [BBC] and there were predictions it could rise to 3% by mid 2017 [FXS].

Again such predictions were dismissed by many in the Brexit camp, though as the year came to an end inflation had hit 3.1%.

Manufacturing slows

Month by month UK manufacturing figures showed declines, companies announced profit losses - due to a weaker sterling, and inflation continued to rise.

In September 2017 UK output once again fell [Reuters].

Companies weren't the only ones beginning to relocate. Seasonal workers from Europe were in short supply in 2017 and food was reportedly rotting in fields with fewer workers to pick them [Guardian]. There were also shortfalls in hospitals as the NHS saw a 96% drop in EU nurses registering to work in Britain since the vote [Guardian].

Reports later in the year pointed to Goldman Sachs setting up two hubs in Europe post Brexit [Reuters].

That was not the only loss to the UK as London then lost two EU agencies to Paris and Amsterdam in another Brexit relocation [Guardian]. 

Again there were few early Christmas presents as late November only brought more bad news with the announcement that Britain was now the 6th largest economy, falling one place behind France [CNN].

Perhaps it was hardly surprising as UK car sales in October showing a seven month decline in October [Reuters] and with Ford's Europe president suggesting the firm could relocate post-Brexit [Verdict].

Indeed the UK economy had gone from top of the G7 leaderboard to almost bottom since the Brexit vote. "We have not done as well in the short term as we would have done if the vote had gone the other way,' Mark Carney said in November 2017 [Independent]

Heading for a fall

And with projections not looking good for 2019 and further downgrades, Britain looks certain to head off a cliff [Independent].  

Whatever type of Brexit is decided upon Britain is heading towards a cliff edge. The only question is how high the cliff is.

As many Remainers persistently maintain there is only one good Brexit, and that is no Brexit. But halting the juggernaut as it careers towards the cliff is easier said than done.

As the hard reality sets in post-Brexit it may be too late to have buyers remorse. Britain may well have burned too many bridges to rejoin the EU and may well find itself out in the cold when it comes to world trade.

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