A Brexit headwind the UK recovery could do without Posted by David Smith at 09:00 AMCategory: David Smith's other articles My regular column is available to subscribers on www.thetimes.co.uk This is an excerpt. Not to be reproduced without permission. The script for the economy’s post-pandemic recovery did not include a sequence in which a series of economic indicators started pointing downwards, and yet that is what we have been seeing. Why is it happening, and how serious is the threat to the upturn? To rehearse some of the evidence, official figures a few days ago showed a surprise 2.5 per cent fall in retail sales last month. Though some diversion of spending from shops to hospitality had been expected, this was not the opening-up spending boost retailers had expected. The
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A Brexit headwind the UK recovery could do without
My regular column is available to subscribers on www.thetimes.co.uk This is an excerpt. Not to be reproduced without permission.
The script for the economy’s post-pandemic recovery did not include a sequence in which a series of economic indicators started pointing downwards, and yet that is what we have been seeing. Why is it happening, and how serious is the threat to the upturn?
To rehearse some of the evidence, official figures a few days ago showed a surprise 2.5 per cent fall in retail sales last month. Though some diversion of spending from shops to hospitality had been expected, this was not the opening-up spending boost retailers had expected. The volume of sales fell back in May after April’s re-opening of non-essential retail, trod water in June and then fell last month.
You write off the British shopper at your peril and the CBI’s latest distributive trades survey, covering part of this month, was buoyant, though also reported very low retailer stocks and mounting supply problems. There is no doubt, however, that this period is proving to be a lacklustre one. The latest Springboard footfall data, monitored on a weekly basis by the Office for National Statistics, showed that footfall in the week from August 15 to 21 (inclusive) was 80 per cent of equivalent levels in 2019, and down by two percentage points on the previous week.
Housing transactions also fell back sharply last month, as the industry paused for breath following the rush to benefit from the full stamp duty reduction, which was extended by the chancellor to June 30 in his March budget. Though a fall was expected, July’s 62.8 per cent drop between June and July was heftier than anticipated.
Then there was the headline-grabbing announcement from the Society of Motor Manufacturers and Traders (SMMT), that only 53,348 cars were made in the UK last month, the lowest since 1956 and 37.6 per cent down on last year, when the industry was coming out of the first lockdown. July is usually an important month for production, in the run-up to the September registration change, though most cars built in Britain are exported, and most sold here are imported.
The immediate weakness of car production was the result of global chip shortages and the “pingdemic” which kept workers away from factories. Overlaying it, though, is the impact of Brexit. In the run-up to the EU referendum, strongly rising production suggested that the industry was on course to beat the all-time high of 1.92 million cars, achieved as long ago as 1972. But the industry has lost capacity as a result of Brexit, as was inevitable, and even before the pandemic struck rolling 12-month output had slumped by nearly half a million to 1.3 million.
The closely-watched purchasing managers’ surveys tell the story well. Taking manufacturing and services together, the “flash” composite output purchasing managers’ index (PMI) has fallen to 55.3 this month, its lowest for six months, and down from 59.6 last month and recent levels above 60.
So what is happening? The UK economy is being affected by a cocktail of factors, some of them global, some very much local. The global factors are well known. Supply bottlenecks, sharply rising shipping costs and microchip shortages are affecting industries the world over, though they not sufficient to prevent a strong global economic recovery.
The Delta variant of the coronavirus is also a global factor which is affecting some countries, including America, more than others, and has seen lockdowns reintroduced in parts of the world. The UK has very high case numbers but, thanks to a successful vaccination programme, only a fraction of the hospitalisations and deaths of previous Covid waves.
But the UK’s vaccination advantage, which earlier provided a springboard for recovery, has faded. The share of the population fully vaccinated in the UK is now exceeded by about a dozen countries, including several in Europe, and others are closing fast.
Then there is Brexit, our very own millstone. While the UK’s PMI fell last month, the eurozone equivalent held up well at 59.5, “close to a 15-year high”, according to IHS Markit, which is responsible for the data.
There remains a dispute about precisely how many EU migrant workers left the UK last year, and we may never know precisely, though people in the haulage, hospitality and construction industries have a pretty good idea. All this was both predicted and predictable.
There are labour shortages in other countries, it should be noted. Covid seems to have resulted in a reduction in the effective supply of labour, particularly for certain jobs, for a variety of reasons Brexit is one reason for the shortages in the UK but it is not the only one.
The government, in response to pleas from various industries to ease migration rules for EU workers has said, in effect, that people voted for this and will have to lump it. With retailers already warning of disruptions to Christmas supplies that is an approach that Yes Minister’s Sir Humphrey Appleby would describe as “brave”. Boris Johnson already has one Christmas debacle under his belt. Steve Murrells, chief executive of the Co-operative Group, says “Brexit and issues cause by Covid” are causing the worst supermarket shortages he has ever seen.
Even before post-Brexit rules have been implemented, the UK’s single market exit is exacerbating supply shortages in the UK. Many firms complain of the difficulties of accessing supplies from the EU. Official figures show that, even after a sharp recovery in the second quarter of the year, imports from the EU in cash terms were 16 per cent down on their 2019 level. The full picture will only emerge when all the distortions drop out of the figures but the omens do not look good.
So what does this all add up to? Has the recovery been stopped in its tracks? If we take the PMIs as a starting point, we should remember that in normal circumstances a reading of 55.3 would be regarded as reasonably strong. Levels above 50 are consistent with growth.
Other measures, such as the timely activity indicators monitored by the ONS, show a mixed picture. Job adverts appear to have flattened out, as have restaurant reservations and credit and debit card spending, though flights are now on a rising trend.
Jefferies, the investment bank, which has monitored activity using real-time data since the start of the pandemic says its activity radar has now flatlined for five weeks in a row. It still thinks the economy is on course for a decent third quarter rise, following a 4.8 per cent expansion in April-June. Whether that rise is as strong as the 3 per cent the Bank of England expects remains to be seen. Jefferies has concerns about a Covid “headwind” in the fourth quarter, if the return of schools brings a big rise in infections. The Brexit headwind will last rather longer.
For now, a range of factors, including Brexit, have slowed the recovery. They have not, however, stopped it, nor should they. But recent events have been a reminder that we should never take upturns for granted. They can be more fragile than they look.