The first 100 days of life outside the EU already provide a glimpse of the practical challenges facing UK corporates & investors, and raise one all-important question: what is the UK’s longer-term economic vision? Ross Walker provides his quick take here.
Brexit has been described as a process, not an event, and economically, the process remains embryonic, with limited hard data to make a clear assessment. Still, although some of the most visible disruption – motorways in the south east of England becoming lorry parks – has been avoided, trade data hints at challenges ahead.
Trade frictions are showing
As the chart below shows, UK trade in goods with the EU fell heavily in January 2021 (-34.4% month-on-month) with only a partial recovery in February (+20.2%), leaving trade with the EU down a whopping 24% on pre-Brexit levels. Some of this hit relates to renewed pandemic restrictions and stockpiling ahead of the end of the Brexit transition period on December 31st. But UK trade with the EU fell significantly more than it did with the rest of the world (-6.5% in January and +2.5% in February).
UK trade: average of export & import values, excluding oil & erratic items (January 2020 = 100)
Sources: UK Office for National Statistics
Trade frictions appear to be more serious than was envisaged at the time the EU-UK trade deal was signed. Rules of Origin requirements are raising administrative burdens and costs for businesses, highlighting, for many, the need to strengthen supply chains & review export strategies. The disruption facing larger firms may have more damaging longer-term consequences if supply chains need to be restructured to bypass the UK.
Frictions around trade between Great Britain and Northern Ireland have boiled over at times. Northern Ireland’s customs and regulatory alignment arrangements are complex and clearly create economic borders within the United Kingdom.
Towards a longer-term vision
We remain firmly of the view that the economic consequences of Brexit will only be apparent over longer periods of time – a decade rather than a few months. Increased frictions are already apparent despite being overshadowed by the pandemic. Whilst manageable, trade frictions are real and seem likely to reduce business investment expenditure over time, impair productivity and slow economic growth. Most independent studies suggest Brexit will lower UK economic growth over the next decade or so by 0.25-0.5% per year – which is actually quite significant when compounded over time.
All of this begs one important question: what should the UK’s long-term economic vision be? And related to that: what should the strategy that helps achieve it look like? There have been some notable individual initiatives – in green finance for example – but nothing that could be regarded as comprehensive. The March 2021 Budget, which in the wake of record peacetime fiscal spending pencilled-in significant tax rises from 2023 – for both corporates and households – makes it difficult to imagine the UK becoming a low-tax ‘Singapore on Thames’ in the way some had envisaged. At the same time, there is scant evidence of any great progress on trade deals with third countries beyond rolling over pre-existing EU arrangements.
Services – where the UK’s long-term economic vision needs firming up
As we wrote shortly after its conclusion, the EU-UK trade deal is a de facto ‘no deal’ for services. Save limited provisions for airlines, hauliers, and telecoms providers, much of the service sector remains in a sort of regulatory no-man’s land.
In March 2021, a memorandum of understanding to create a ‘Joint UK-EU Financial Regulatory Forum’ was reached. Whilst this might conceivably morph into a body which facilitates greater financial market access, it remains nascent at this stage. Financial services equivalence isn’t likely any time soon. At the same time, the Bank of England Governor has made clear his view that the UK cannot be a rules-taker from Brussels on financial services and has questioned EU demands for the relocation of personnel and operations.
Such regulatory tensions are unlikely to disappear any time soon, but given the country’s heavy economic reliance on services in general (and its specialisation in financial services, specifically) they need to be overcome if the UK is to consolidate & put forward a credible long-term economic vision.