Sunday, October 07, 2018
A Brexit deal by Christmas? Even that's too late as uncertainty bites
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

And so it goes on. Businesses hoping for clarity on Brexit from the party conference season were hoping in vain. With less than six months to go, there are at least six different possibilities.

They include a failure to negotiate a withdrawal agreement with the European Union; a failure to get a deal through parliament; a second referendum – now more or less backed by Labour; a general election; and an extension of the Article 50 Brexit process. Labour has helpfully said it will oppose any deal negotiated by Theresa May, while the Tory “chuck Chequers” crew seems happy to join Jeremy Corbyn in the division lobby when the time comes.

The possibilities also include, of course, an outbreak of sweetness, light and common sense on both sides and an agreement to leave the status quo in place during what is likely to be a long transition during which Theresa May’s “deep and special partnership” with the EU is negotiated.

There are signs of optimism this weekend from EU officials, including the Commission president Jean-Claude Juncker, that an agreement on withdrawal is close, and this has boosted the pound. However, it is not yet clear what the solution will be to the Irish border issue, though it could involve Britain effectively staying in the customs union for a very long time, and Brussels is a very long way from accepting Mrs May's Chequers' proposals as the basis for future negotiations.

Were there to be an agreement in the next few weeks there would be a huge sigh of relief from business. I am sceptical of whether it will bring a significant “deal dividend” for the economy, as promised by Philip Hammond at the Tory conference, but it has to be infinitely better than a disruptive and highly damaging no-deal Brexit. As a way of killing of Britain’s car industry, and others, no-deal would be hard to beat.

The chancellor, who was deprived by the prime minister of the chance to announce the ninth successive fuel duty freeze in his speech – a tax that is withering on the vine so badly that it cannot be too long for this world – has to manage the “sunlit uplands” that will follow a deal; the promised end of austerity next year. This for a chancellor who reportedly told cabinet colleagues that there was no money left after the National Health Service’s 70th birthday settlement.

All that will come later. For now, the uncertainty persists. What impact is it having? That the economy has slowed is not in doubt. Latest official figures show that gross domestic product (GDP) growth has slowed to 1.2%, just over a third of its rate in late 2014 and early 2015, when the economy was getting into its post-crisis stride. Growth in the first half of the year was its slowest for six years, when the eurozone crisis was bearing down on Britain’s economy.

The interesting thing about the growth slowdown is that it is more or less in line with the view of the majority of economists, and me, about the likely short-term consequences of Brexit, which is that Britain’s GDP would be around 3%, or roughly £60bn, lower by 2020 as a result.

A new assessment by George Buckley, a veteran London-based economist with Nomura, the Japanese investment bank, suggests that is very much the case and, indeed, may be a best-case scenario. The calculation, which is derived by looking at the slowdown so far and comparing it with both Britain’s average growth over the past two decades and the performance of “peer” economies in the G7, looks entirely plausible.

As Buckley points out: “This methodology suggests the UK will have lost 3% of GDP in relative terms which we believe is largely down to the Brexit process. The loss could have been even greater had it not been for stimulus in the form of weaker sterling and monetary and fiscal support packages. And, of course, it could be substantially greater still in the event of a disorderly no-deal Brexit.”

In practical terms, Brexit and the renewed squeeze on real wages as a result of sterling’s Brexit fall, have been a factor in the outbreak of extreme retailing woes we have seen this year. Ross McEwan, the RBS chief executive, as well as warning in a BBC interview that a no-deal Brexit could tip the economy into recession, said the bank was becoming more cautious about lending to the retail sector.

Brexit uncertainties have held back business investment, as official figures now clearly show. Instead of rising by 6%, 8% or 10% annually, as was expected at this stage of the cycle, business investment has fallen over the past year. This is the reality behind the Brexit warnings from business.

The economy has not collapsed, which is the good news, though even the Treasury’s much-maligned short-term forecast did not predict that. The latest purchasing managers’ surveys, which measure business-to-business activity, suggest growth of between 0.3% and 0.4% in the third quarter, compared with a “norm” of 0.5% and 0.6%. The service sector is holding up, though growth slowed slightly last month, but construction, after a bounce from the “Beast from the East” disruption earlier in the year, is struggling.

Manufacturing did a little better last month but its performance is described by HIS Markit, which compiles the purchasing managers’ surveys, as “lacklustre”. Growth has slowed markedly from last year’s short-lived boost to exports from the weak pound.

The detail in these and other surveys chimes with the conversations I have with many business people. They do not record the exasperation and anger with politicians I get from many of them. The economy has slowed but business life has to go on. That also explains why, for example, the job market has held up even as growth has faded.

So respondents to the service sector purchasing managers’ survey reported that “Brexit concerns among clients and heightened economic uncertainty remained the main constraints on growth” but that also many firms continue to be beset by staff shortages and are thus still recruiting.

There was a similar story in the construction industry, but, again, recruitment remained healthy in a sector where the fears about the future supply of workers are intense.

Manufacturers appear most uncertain, as last week’s Paris Motor Show warnings from BMW and Jaguar Land Rover underlined. Large manufacturers are shedding jobs, while smaller ones are recruiting. Some firms are stocking up to cover themselves in the event of a disorderly departure from the EU, while others are running them down in the expectation that demand will be even weaker after March 2019. Confused and uncertain? They are.

When will the uncertainty lift? We have now moved into “it should all be over by Christmas” territory in terms of the negotiation with the EU, which means that the parliamentary process will drag on into next year. Many firms cannot leave it until the last minute to take contingency action.

I still think it is probable that there will be compromises in coming weeks, particularly on the Irish border, and that a withdrawal agreement followed by a long transition is still more likely than no deal. But this has been a damaging and dispiriting exercise for the economy and business. And it is not over yet.