Last Tuesday there was a 5 mile lorry queue on the M20 near my home as the French allegedly tested Brexit procedures. It is still possible that this was a coincidence, though it happened at a tense time in the Brexit negotiations. Meanwhile a 27-acre site near the Ashford Designer Outlet shopping centre has been turned into a lorry park in case it is required for No Deal.
In fact the outstanding issues for the Brexit deal between the UK and the EU which involve the so-called level playing field and fish affect a relatively small proportion of the economy. The level playing field is largely relevant to manufacturing, which accounts for 8% of UK jobs. Fishing accounts for 0.02% of UK GDP and even if all the fish in the UK zone were caught by UK fishers (apparently the term fishermen is now too sexist!) the figure could not possibly exceed 0.05%. Moreover if there is a ‘No Deal’ Brexit and EU boats were banned from UK waters but the UK were unable to sell fish in the EU and total catches remained the same, UK consumption of fish would have to rise between 2 and 3 times to eat all the fish caught as there would still be some imports which are typically of different fish species (mainly tuna). One suspects that the biggest potential beneficiaries of a No Deal Brexit could be the UK’s cats who might find themselves dining off a much higher quality and quantity of fish leftovers!
Given that relatively small parts of the economy are affected by the outstanding Brexit issues, it is interesting that the OBR has just estimated that a no deal Brexit will cost the UK about 2% of GDP compared with the current deal on offer. The EU economy will also be affected, though as it is 6 times larger than the UK, the proportional impact will be much less. Our analysis of the effect of the likely long term loss of London as the major EU financial sector is a hit to EU GDP of 0.28% from higher dealing costs and increased market inflexibility.
There is a law that says that the ferocity of any debate is inversely proportional to what is at risk. Hence academic debates, where only pride is at stake, are heated. By contrast, nuclear negotiations, where a mistake could lead to the end of the world, normally proceed with studied calm. Both the UK and the EU negotiators have seemed to react in what appeared quite extreme ways during the past week, which on this theory means that there isn’t much dividing them.
Our view has been that a Brexit deal has been likely all along and we still think this will happen. Both sides will draw it out and the clock will be stopped but ultimately it is hard to see any good reason for a deal not happening. Much of the current behaviour is play acting to highly politicised audiences. Had two competent economists been handling the issues the negotiations could have been completed in a morning, followed by a well deserved lunch.
Assuming a deal happens, what next? Travelling could become slightly less convenient than previously, though it seems ultimately unlikely that countries would further damage their tourist industries, even in the event of No Deal. In economic structure terms, the composition of UK trade could start to change quite noticeably with food and drink imported from around the world rather than from the EU and a sharp drop in manufactured goods purchased from the EU. UK manufacturing, which is highly integrated with that in other EU countries, will certainly be heavily affected. Will the City lose out? Initially yes, as various clearing activities move away and as the EU tries to develop its own financial centres. But long term what happens in the City will depend on how the City links with New York, Shanghai, Tokyo and Singapore. Some form of market integration between these centres could mean that the cost of capital in London would be so much lower than in regional markets in the EU as to make them largely unviable except for relatively small deals where local knowledge could make the difference.
It is still mainly unknown in Whitehall that the UK’s biggest single industry is the ‘Flat White Economy’ where the creative sector and the tech sector have merged together. When we last did the calculation a year ago, the Flat White Economy directly accounted for even more GVA (14.4%) than the whole of industry (13.8%). Whether the UK does well after Brexit largely depends on how this sector (which Covid has turbo charged) will fare. This will depend on access to skilled employees and on regulations not being developed within the EU that freeze out UK firms. This will be hard as the trade takes place down phone lines without the need for lorries and customs people.
The economist in me would quite like to see the results of a No Deal experiment because I suspect so many gloomy predictions would be proved wrong. But in reality, a deal would be better for the economy and there would be less pressure to move to a pescatarian diet.
For more information, please contact:
Douglas McWilliams dmcwilliams@cebr.com phone: 07710 083652