Sunday, December 23, 2018
Confidence zapped as no-deal worries return
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.

It would be great to report that we are ending the year on an upbeat note, with uncertainty banished and confidence riding high. Unfortunately, and though I don’t want to spoil anybody’s festive fun, neither of those things are true.

According to the closely-watched GfK consumer confidence index, which has been running since the 1970s, households are ending the year “on a pessimistic note”, with confidence lower even than in the immediate aftermath of the referendum. Though this did not prevent them taking advantage of Black Friday bargains last month, they are downbeat about prospects for their own financial situation, and markedly so about the outlook for the economy. Confidence has not been this low for five years.

Business confidence, meanwhile, is also in the doldrums. On some measures, including the ICAEW (Institute of Chartered Accountants in England and Wales) index, it is it at is lowest since the financial crisis. On others, such as the Federation of Small Businesses’ index, it is at a seven-year low.

It is not hard to see why. Business groups have been at best lukewarm and in some cases openly hostile about the proposals set out in the government’s immigration white paper, of which more below.

More worryingly for business, many thought that talk of a no-deal Brexit, which as I described here recently as madder than any number of mad things you can think of – I left out George the Third – had been safely buried. But, like the many-headed hydra or the black knight in Monty Python’s Holy Grail it will not lie down, and is revived on almost a daily basis, usually by spivs or failed politicians.

The fact that the government has stepped up its no-deal preparations, and is allocating £2bn to government departments and putting 3,500 troops on standby, has added to the concern. Though Downing Street continues to insist that the prime minister’s deal will prevail, if it was certain it would not have embarked on these preparations.

Such is the weird mood that people cannot make up their minds whether the latest phase of the EU’s no-deal preparations would make a disruptive Brexit slightly less disruptive or are an attempt to stitch this country up.

The measures, which will extend equivalence for some financial products, allow flights between the UK and EU and allow UK hauliers to carry goods into the EU for nine months, are intended to minimise the effects on the 27 of the abrupt exit of the 28th. They do not make a no-deal Brexit any less silly.

The disadvantages of a no-deal Brexit are many and large. It would not, as constitutional experts have assured me, absolve Britain of the responsibility for most, an d probably all, of the £39bn “divorce bill”, unless this country wants to start its new era as a pariah state which leaves without paying. We do not, as many continue to exasperatingly claim, trade with the rest of the world on “WTO terms”. We trade on the basis of agreements and arrangements, negotiated by the EU, which are superior to basic World Trade Organisation terms, and which we probably could not carry over in the event of a no-deal Brexit.

The idea of a “managed no-deal” is also a fiction. As Tim Durrant of the think tank the Institute for Government wrote after the EU announced its measures: “The EU has made clear it is not willing to negotiate a so-called managed no deal – it will take temporary unilateral measures to mitigate the impact of no deal on EU businesses and citizens. They are not planning for the UK to retain “the terms of any transition period”, which is a key component of the withdrawal agreement – so there is no “managed glide path” available, where the UK keeps the transition and reneges on the rest of the prime minister’s deal.”

In the City, the probability of a no-deal Brexit has been raised; Berenberg, a bank, has just raised it from 10% to 20%, the same as for Theresa May’s withdrawal agreement getting through the House of Commons, but lower than the 25% probability Berenberg puts on Brexit not happening at all.

It is good, therefore, that business has risen up against the danger of no-deal, with five business organisations, the British Chambers of Commerce, the CBI, the EEF, the Federation of Small Businesses and the Institute of Directors, writing a joint letter last week of their “horror” at the parliamentary process and the rising risk of a no-deal Brexit on which, they warned, “there is simply not enough time to prevent severe dislocation and disruption”. A no-deal Brexit, of course, does long-term damage as well as carrying serious short-term risks.

The last word on no-deal should go to Sir Ivan Rogers, Britain’s former ambassador to the EU and an expert the government would have done well to keep on board in the past two years. As he put it, in a recent lecture at Liverpool University: “Because so-called ‘WTO rules’ deliver precisely no continuity in multiple key sectors of the economy, we could expect disruption on a scale and of a length that no-one has experienced in the developed world in the last couple of generations.”

And, he added: “Markets continue to react … as if something must turn up and that “no deal” is a virtually unimaginable scenario for politicians professing to be serious, to contemplate. That risk has therefore been seriously underpriced for a year or more, because we are dealing with a political generation which has no serious experience of bad times and is frankly cavalier about precipitating events they could not then control, but feel they might exploit.”

If no-deal is the worry as we end 2018 and move into the uncertainties of 2019, what about immigration? The government’s white paper, like the prime minister’s EU withdrawal agreement, has managed to earn the disapproval of just about everybody.

Migration Watch, the pressure group devoted to cutting immigration, is worried about a proposal which would allow unskilled and low-skilled workers to come to Britain for up to a year. Businesses are concerned that they will be faced with much higher levels of bureaucracy when recruiting workers from overseas, and that the ready supply of EU migrant workers is over, particularly for jobs paying less than £30,000 a year.

They have a point. The white paper itself envisages negative net migration, an overall outflow, of EU workers between 2021 and 2025, at a cost of up to £4bn for the public finances (they are net contributors). The EEF warns that employers will have to pay “thousands of pounds to cover the cost of visas, the immigration skills charge and the health surcharge for new EU workers”. This is no bonfire of red tape.

The National Farmers Union warns that the new 12-month visa system will be “highly disruptive”. The Institute of Directors says the white paper can be realistically viewed as a work in progress.

All fair comment. But, to also be fair, the white paper is confused because it is the product of a government in a state of confusion, and it could have been a lot worse. The 100,000 annual net migration figure has been dropped, the 12-month visa scheme was better than expected and overseas graduates and those with higher qualifications will be able to stay for 6-12 months to find employment. It did not do much for confidence, but it could have been worse.