Sunday, February 14, 2021
Not Project Fear - but Brexit reality for firms and the economy
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 takes something to break through the blanket coverage of the pandemic, on which the news is not as encouraging as it might be. I don’t think, a year ago, that many people would have been anticipating the introduction this month of the harshest travel restrictions so far, or for there to be a debate about whether even staycations will be possible this summer. I think they will, but I am an optimist on these things.

What is clear, I think, is that even with a successful vaccination programme there is not going to be a “with one bound we are free” moment. Restrictions should be less than now in the April-June period, but they will not have been removed completely. That says something about the nature of the coming recovery. While we are still on course for some big year-on-year gains in economic activity, after last year's worst-for-300-years plunged of 9.9 per cent, for many businesses it will seem like slow progress and a long haul.

One thing has broken through the blanket coverage, however, and that is the UK’s new trading arrangements with the EU. The penny appears to be dropping. Peter Cowgill, the chairman of JD Sports, spoke for many when he said that Brexit was turning out “considerably worse than feared”. He is considering establishing a new distribution centre within the EU as a result of trade frictions and red tape costs running into “double digit” millions. The UK’s deal with the EU was “not properly thought out”, he added.

A survey by the British Chambers of Commerce (BCC) found that nearly half, 49 per cent, of exporters were finding trading difficult. They outnumbered the proportion finding it easy by more than three to one.

“Trading businesses – and the UK’s chances at a strong economic recovery – are being hit hard by changes at the border,” said Adam Marshall, director general of the BCC. ““For some firms these concerns are existential and go well beyond mere ‘teething problems’. It should not be the case that companies simply have to give up on selling their goods and services into the EU.”

The government has found itself in a battle with the Road Haulage Association (RHA), a non-political members’ organisation, over its estimate that exports going via British ports to the EU last month were 68 per cent lower than a year earlier, and that between 65 and 75 per cent of lorries coming to the UK from the EU are returning empty. We have to wait a while for the official figures for exports to the EU in January. Informal government figures, briefed to the BBC, suggested that trade has recovered this month.

These are not the only impacts. Quite a few people pointed out, perfectly fairly, that last week I left the Brexit deal, with its higher costs and red tape, off the list of factors that will push inflation higher in coming months.

None of this is particularly surprising. The UK-EU trade deal was concluded late and in the middle of a pandemic and it was struck by politicians and negotiators with little or no experience of business and the damaging impact of red tape, non-tariff barriers and tariffs on products imported into the UK and re-exported to the EU. When the focus was on sovereignty, it was not surprising that the economy took a back seat.

It is not, of course, the only effect of Brexit. Though the City of London is comfortably Europe’s largest financial centre, and is set to remain so, it has lost its place to Amsterdam for share trading – which was a symbolic blow - and there is uncertainty about future mutual recognition and equivalence arrangements.

These are not the only problems for business since January 1. Trade between Great Britain and Northern Ireland remains problematical as a result of the trade border in the Irish Sea. This is no longer attracting the headlines that it did but persists.

As I say, none of this is surprising. It is not a “project fear” forecast, but it is the new reality. The Bank of England estimates that the disruptions to EU trade will reduce the UK’s gross domestic product by 1 per cent in the January-March period.
That is not nearly as much as the fall resulting from this lockdown, but accounts for about a quarter of the drop in GDP the Bank expects this quarter.

Many businesses will, over time, have to absorb the new red tape and get on with it or, as JD Sports has suggested, take action by relocating some activities within the single market to minimise some of its effects. Others, mainly smaller firms, will stop trading with the EU altogether.

As businesses adjust, so some of these short-term effects will fade. That still leaves the long-term, however. A Downing Street spokesperson was asked last week whether the government would be publishing an impact assessment on the UK-EU trade deal and the answer was that it would not be. There was a time when even modest policy changes warranted such an assessment.

Fortunately, other assessments are available from reputable sources. The Bank has estimated that the economy is roughly 2 per cent smaller than it would otherwise have been as a result of the 2016 referendum result. Business investment, even before the pandemic, was 20 per cent lower than it would have been.

As for the future, in this month’s monetary policy report, the Bank said that, in comparison with frictionless trade, the government’s deal will leave UK trade around 10.5 per cent lower, and productivity and GDP some 3.25 per cent period. Most of these effects will come through over the next three years.

An assessment by the UK in a Changing Europe think tank came up with similar, though slightly larger, estimates. It sees a big hit to UK exports to the EU, down 36 per cent compared to membership after 10 years, with imports from the EU also down, by a hefty 30 per cent. Overall, it sees UK trade 13 per cent lower. GDP takes an overall hit of around 6 per cent, as do per capita incomes. The UK’s already weak growth rate is reduced by around 0.5 per cent a year.

Does it have to be like this? The optimistic view, that the Christmas Eve deal was just a framework which could be improved upon over time is having to fight against a deterioration in relations between the two sides, for which both are to blame. It is a pity but that may pass over time. We could do with some damage limitation.