“Procrastination Vacuum” by Tim Jones – Chairman, DCBC

14 Oct 2016

It seems like months have passed since the referendum decision. Despite this, the whole issue of Brexit becomes even more complicated and frustrating with virtually no clarity coming from the Whitehall Team. This leaves South West Businesses having to try and second guess what we should be planning for in the mid and long term. The only clear statement from the Prime Minister is that we can anticipate departing formally in 2019. Other than this there has been no consistent advice as to whether we will be facing a “soft” or “hard” exit or something between the two. Inevitably the market has responded with considerable nervousness to this. The last thing business needs is uncertainty.

The immediate expectation following the decision was that we would enter into a period of economic retrenchment and could expect that some of the dire predictions would immediately be felt. As the weeks have gone by it appeared that this was a gross overreaction. Certain sectors of the economy have proved remarkably resilient. Mortgage lending, for example, showed its strongest growth since 2007. The service sector (which represents 4/5th of the UK economy) has continued to grow and is up 0.4%. The FTSE 100 has reached an 8 week high, partly because the US Federal Reserve have decided to hold their interest rates. There has always been a concern regarding the FTSE 100 as most of the companies in this trade in international markets and many have dollar denominations. The FTSE 250, however, is also trading at a high. This is a more accurate reflection of the composition of the UK’s corporate structure. It was also interesting to note that the car manufacturing sector has shown a 14 year high in the number of cars built. They are at their busiest since the days when the UK made Ford Escorts and Rovers. Production is up 9%. A dramatic turnaround from the dark days following the closure of Fords Dagenham plant and Rover going bust. This success, however, has been led by international investment with Nissan at their Sunderland plant, Mini under BMW and Jaguar Land Rover in the West Midlands and Merseyside following major investment by Tata Group. This sector also drives UK exports with 3 out of 4 cars boosting our export targets, half of these going into the EU.

Against this, however, the latest figures for industrial activity are showing a fall of 0.4% in August. This sector represents 15% of the UK economic output. The Federation of Small Businesses are reporting a 4 year low in the confidence of their members. This is delaying investment decisions. The main concerns expressed being uncertainty about the UK’s ability to negotiate new trading agreements, the rising value of foreign exchanges, increasing employment and pension costs and the rising costs of imports. A survey of UK Chief Executives found that 75% are considering moving Headquarters to keep in touch with European Markets.

The official advice from the Bank of England Financial Policy Committee is that the UK faces a period of uncertainty. The Chancellor of the Exchequer warns that we are entering a period of turbulence and will suffer “a bit of a rollercoaster”.

How true were these words which, when put beside the Prime Minister’s apparent commitment to a “hard Brexit” solution, triggered yet further falls in the value of Sterling including a “flash crash”. The market settled but Sterling is now trading at a 31 year low. It had been hoped that the depreciation of Sterling since the end of June would boost exports of goods and services. These have however only risen by £100 million between July and August and has been dwarfed by a £2.6 billion increase in imports.

Our Politicians tried to calm the market however the volatility the Chancellor had eluded to is likely to be repeated in the next weeks and months as the real impact of the referendum decision is fully understood.

What does this mean to the South West?

The number of jobs in the South West that are dependent on trade with the EU is approximately 360,000 with the value of trade being around £8.2 billion. This does not, however, tell the whole story as the UK as a total has 3.6 million jobs which are dependent upon trade with the EU whilst the EU has 5.8 million jobs which are dependent upon trade with the UK. In short, therefore the reality is that Europe is an important if not vital trading partner for the South West.

Guidance from those who are leading the negotiations, who are principally David Davis and Liam Fox with a helping hand from Boris Johnson, remain spectacularly unclear. Liam Fox seems hell bent on a “hard” Brexit solution which would mean tough border controls, trade tariffs and even visit restrictions on EU citizens who wish to holiday in the UK. Fox is also keen to pull out of the EU Customs Union which allows free movement of goods with no tariffs. This currently means that driving a lorry from London to Munich is as easy as driving from London to Manchester. Coming out of the Customs Union would mean a whole raft of tax hurdles such as VAT and other duties. It is estimated that 5,000 new Customs Officers would be required costing around £250 million per annum.

Industry reaction to all of this has started to become vocal. The Japanese are pushing very hard to remain in the single market. Their concerns are that they will otherwise suffer tariffs on exports into Europe. Currently, Japanese companies such as Hitachi, Fujitsu, and Nissan employ around 140,000 in the UK. President Obama has clearly stated that the UK would be at the back of the queue for a trade deal with the US. This comes at a time when, in light of weakening of Global trading, the US and many other countries are adopting a more protectionist stance. This includes both Presidential hopefuls – Donald Trump and Hilary Clinton.

Countries who have been trying to negotiate new trade deals have got caught up in the middle of all of this. Canada, for example, thought after 7 years of negotiation that they had one EU intergovernmental deal agreed. This has now been rejected by the European Parliament and they are faced with having to reach separate agreements with dozens of National and Regional Parliaments across Europe. Behind all of this is a growing awareness by Politicians that they should be very cautious about their electoral mandate and that global public opinion has swung against free trade deals. Against this background, it would not be too pessimistic to speculate that new trade deals will take 8-10 years to complete.

What can we expect by way of assistance during these uncertain periods? The Bank of England has done almost all it can by reducing interest rates and undertaking a new round of quantitative easing. They are, however, predicting that inflation will dramatically increase from current low levels to over 2%. This is largely because of our dependence on high levels of imports into the retail sector (mainly clothing) and the fact that fuel oil is Dollar traded. We are already beginning to see pump prices increasing and the cost of home heating will quickly follow. An additional area of concern would be a slowdown in the London Financial Services sector. Currently, this conducts 78% of the EU’s foreign exchange business. There are dire threats that hard Brexit could affect 70,000 jobs in the Financial Services sector including the City of London. Why is this important to the South West? Because a huge amount of discretionary spending from London ends up in Devon & Cornwall, the South East also drives much of the South West’s short break holiday market.

There has been increasing concern regarding the Government’s commitment to European Structural Funding which is vital to the South West across all sectors and most particularly to the rural economy. Here again, no clarity or guidance has been given.

A lot, therefore, rests on the Autumn Statement which is scheduled for 23rd November. Here again, the mood music from Whitehall does not give grounds for encouragement. We have not unreasonably been hoping for a major round of infrastructure investment. The Chancellor has now said that there will be no “fiscal splurge”. He is not ruling out investment but is indicating that spending will be restricted to high-value economic projects such as the removal of road bottlenecks. Projects of this nature he says are loved by the Treasury because they are relatively small and score well in terms of economic benefits relative to cost. Modest projects are also able to be brought forward more quickly giving an opportunity for delivering short term stimulus and long term productivity benefit.

It is against this background that we enter into a period of considerable uncertainty. The business community in the South West is resilient however we are entitled to greater clarity than is currently emerging from our Senior Politicians.

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