With the Prime Minister having negotiated an agreement for withdrawing from the EU and surprise data showing that inventories actually declined in Q3 rather than rose as we had expected it is time to reassess the Cebr forecasts for the impact of Brexit on the inventory cycle. Because some companies will hold off building up stocks until they see whether the withdrawal agreement is implanted, we have revised our estimate down a small amount. But with GDP likely to be boosted by 0.65% in Q4 and in Q1 next year and then reduced by 0.4% between Q2 and Q4 next year, these swings will dominate GDP.
Our basic assumption was that any business trading with the EU would need to plan for a disorderly Brexit where trade with the EU was disrupted. Since logistics are a critical factor in modern business, this would mean that they had to build up inventories to ensure that supply contracts were met. One factor affecting this is that warehouse space is at its most scarce in the present century – according to Savills Research the warehouse vacancy rate is currently only 5%, the lowest since their statistics started. Since a characteristic of warehouses is meant to be easy availability, this number is very low and particularly surprising given the emerging weakness of UK consumer spending.
How does Theresa May’s Brexit deal affect this? The answer is rather less than one might have expected. My working assumption had been that the chances of the Chequers plan (which, with a few tweaks, is essentially the deal) going through were about 50-50. But with ambitious Cabinet ministers like Raab and McVey resigning, there is a sense that the ship might be sinking. A party leadership election looks likely. If the PM survives that, which she well might since the opposition to her will be split, she may have to hold an election to get her deal through Parliament. And the danger from putting your fate in the hands of the voters is that they can quite often refuse to do what they are meant to do….a Corbyn win is by no means impossible.
Cebr is neutral on Brexit, reflecting the wide variety of views on our staff. And there is a case for saying that long term the withdrawal agreement might prove worse economically than either No Deal or remaining in the EU. But the British public might warm to something that seems to be opposed equally by the ideologues on both sides. Brits don’t really do fanaticism…
Businessmen are often risk takers. But they also try to mitigate uncontrollable risks. And with a No Deal Brexit remaining very much a possibility they have to spend some money preventing the sort of supply disruptions that could prove life threatening to their business. Furthermore, the timelines are too short to enable many manufacturers and importers to wait and see what happens. We were, however, surprised by the Q3 inventory data which showed an unexpected £850 million fall. It appears however that quarterly data are distorted by large changes in inventories in two sectors – energy, which has its own subcycle, and distribution, which account for 36% of inventory but only 14% of output.
Our latest calculation is that with the risks of a disorderly Brexit remaining, many businessmen will continue to insure against it by building up stocks of supplies from the EU, but some will hold off until they see what is happening. So we have revised down our forecast of pre Brexit stockbuilding from £38 billion to £34 billion to account for this, assuming No Deal. These numbers will need to be updated if the Withdrawal Agreement holds. But it now looks as though the stockbuilding impact will be more concentrated in time than we had assumed. We had assumed that it would be spread over three quarters. It now looks as though it will be mainly concentrated in Q4 and in Q1 next year. So the impact on GDP in the quarters affected goes up from 0.5% to 0.65% The impact on GDP post Brexit when inventories are adjusted downwards is slightly lower than the previous calculations but will probably take as long as we previously assumed reducing GDP by 0.4% over the three quarters after Brexit. It probably still means a post Brexit recession if there is No Deal.
Contact: Douglas McWilliams, firstname.lastname@example.org no.: 020 7324 2860