Brexit tide is finally turning

Brexit is not yet done and there are plenty of problems that still need fixing, especially in Northern Ireland and in the service sectors. Nonetheless, public perceptions of Brexit have improved significantly, business concerns are fading, and now we have hard evidence of a quick rebound in UK goods exports to the EU too.

According to the latest Ipsos MORI poll, more Britons now think the decision to leave the EU has had a positive impact on the UK (39%) than negative (38%). Of course, this is well within the margin of error, but it reflects an 8-point increase in positive sentiment in just one month.

In addition, a new poll by JL Partners for Bloomberg suggests that if there were a referendum tomorrow, 56% would vote to stay out of the EU and only 44% to rejoin (don’t knows and won’t says excluded).

This can largely be attributed to the mess that the EU is making of the response to Covid. Some will continue to argue that the UK could have developed, approved, and rolled out the vaccines more quickly even if still subject to the EU’s rules. That’s fair enough. But it is surely no coincidence that ‘Brexit Britain’ was the only country to go its own way.

The EU’s vaccine failures and the over-reach by the Commission also illustrate many of the fundamental weaknesses of the bloc. These include the difficulty of coordinating policies and funding across so many nations (the EU’s larger size has counted for nothing), excessive and inefficient bureaucracy, and an overly-cautious approach to regulation.

The divergence between the UK and the EU on the vaccine rollout and lockdowns is already having a marked impact on the outlooks for their respective economies. For example, both the OECD and IMF have recently revised up their forecasts for global and UK growth, while barely changing their numbers for the euro area. According to the latest Reuters survey, the near-term outlook for the euro area has actually deteriorated.

The many ways in which the Commission and national governments have escalated contract disputes, threatened to block exports – and even raided factories – is also likely to do lasting damage to the attractiveness of the EU as a place to invest and run a business.

Obviously, it is not all ‘bright sunlit uplands’. Many UK companies – especially smaller enterprises and individuals – are still struggling with the increases in barriers to trade between the UK and the EU. The additional checks between Northern Ireland and mainland Britain are clearly one of several factors behind the renewed unrest in Belfast too.

But recent surveys at least provide some reassurance about the impact on the UK economy as a whole. In particular, the latest Deloitte poll of CFOs shows that concerns about Brexit have dropped sharply down the risk list, having been top for long periods since 2016. Indeed, ‘deflation and economic weakness in the euro area and the possibility of a renewed euro crisis’ is now seen as bigger risk.

The Deloitte survey also suggested that most (mainly larger) businesses have faced only mild or no Brexit disruption. Just under 10% of CFOs have experienced ‘significant’ or ‘severe’ problems, but this proportion is expected to drop to 3% in a year’s time.

Some other surveys are more pessimistic. One by EY and London First found three-quarters of respondents faced some degree of disruption following the end of the transition period, and half of those expect it to continue over the long term.

This may be more representative of the experiences of smaller companies. However, the EY/London First polling was conducted earlier (16-22 February, compared to 17-29 March for the Deloitte survey), and so may not be as up to date.

There are other problems with these surveys too. Those run by trade bodies are often self-selecting, with companies facing disruption more likely to reply than those that are not. The responses also often tell us little about the magnitude of any disruption (just that there has been some), or its duration.

Finally, it is not always easy to disentangle Brexit-related factors from broader trends. In particular, one of the most common problems cited by UK importers and exporters is a jump in transport costs. But this is mainly a global phenomenon, driven by limited shipping capacity and the rebound in oil prices.

It therefore makes sense to put most weight on the hard data, rather than rely on surveys or anecdotal evidence.

In particular, the latest data on international trade, published this week by the Office for National Statistics, are reassuring. Exports of goods to the EU had slumped by 41% y/y in January, though this was at least a lot less than some had feared. (The Observer had led on 7th February with a claim that exports to the EU had been ‘slashed by 68% since Brexit’, which was clearly OTT.)

More importantly, the February data showed a strong rebound between January and February, after the rocky start at the end of the transition period. Exports (both to the EU and the rest of the world) were still lower than the pre-Covid levels a year earlier, but this measure should turn positive from March.

Preliminary estimates from French customs are already signalling a further improvement. According to the French, ‘trade in goods between France and the UK, both exports and imports, has been rising steadily since January and by March was close to normal, allowing for the persistence of the economic consequences of the pandemic’.

It is worth noting also that the February UK data included a decent recovery in exports of food to the EU.

And specifically on fish and shellfish, the big fall in exports to the EU in January (-65% y/y) was largely reversed in February (-9% y/y). This is still down 26% on the average in H2 2020, but heading in the right direction again.

UK imports of food from the EU have been largely unaffected, despite pre-Brexit fears of empty shelves and higher prices (though this partly reflects delays in the introduction of UK border checks and SPS controls).

It is too soon to sound the ‘all clear’, either on goods or on services (where the data are patchier and the impact of non-tariff barriers potentially greater). Nonetheless, the early evidence suggests that most of the initial disruption to trade has already been overcome.

In short, sentiment towards Brexit has already taken a sharp turn for the better. The relatively strong economic recovery in the UK and the quick bounce back in trade with the EU can only help.

This is an expanded version of an article first published by the Daily Telegraph on 13th April 2021

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