Brexit 2nd Year progress to date (22.5.2022)
It should be noted that whilst quarterly data is significantly more accurate than monthly data, it is still subject to correction for errors and assumptions, particularly those in the last month of the quarter, and therefore less accurate than annual or year to date figures, such as inflation rate.
It should also be noted that there was a change made in the way UK trade statistics are calculated in January which has the effect of depressing the figure for January.
A. UK Economic Performance in 2022
A1. GDP
Quarter 1 growth for G7:
Canada 1.4%, UK 0.8% , Germany 0.2%, France 0.0%, Italy -0.2%, Japan -0.2%, USA -0.4%
(Reference 1)
UK GDP increase in Quarter 1 2022 of 0.8% was on the back of the UK having the largest increase in GDP in 2021 of the G7 countries of 7.4% (2)
UK GDP is estimated to have increased by 0.8% in Q1, and by 8.7% compared with Q1 2021. (2)
In Q1 2022, UK construction output reached a record high, just surpassing the previous high set in Q1 2019 (in seasonally-adjusted constant prices terms). (3) There were 46,000 new homes registered in Q1, a 25% increase on Q1 2021.
Manufacturing output grew 1.3 per cent in Q1 2022 on Q4 2021, but as in Germany, is still below February 2020, pre-pandemic levels. (4) Aerospace manufacture continues to be in the doldrums due to less travel in the past two years, and perversely, pharmaceutical manufacture is declining due to reduced Covid vaccine demand. The UK remains the ninth largest manufacturing country in the world despite its long membership of the EEC/EU when much of UK manufacturing moved to the continent and Far East.
The level of quarterly GDP in Q1 2022 is now 0.7% above its pre-coronavirus level (Q4 2019). (5)
We can expect Q2 to be more difficult with rising inflation, notably energy costs, and increased taxation and national insurance dampening spending. This is all disappointing but the USA GDP has been flat lining or declining each month since October. Germany and Italy are still to get back to pre pandemic GDP levels. Time will tell which economies will perform best in 2022.
France:
GDP stagnated in Q1 2022 (0.0% quarter on quarter) in connection with the weakness of the domestic demand".(6)
Germany:
"The gross domestic product (GDP) rose by 0.2% in the first quarter of 2022 on the fourth quarter of 2021 after adjustment for price, seasonal and calendar variations. Economic performance thus increased slightly in the first quarter of 2022, following the recovery of the German economy last summer and the decline at the end of 2021. The economic consequences of the war in Ukraine have had a growing impact on the short-term economic development since late February". (7)
EU & Euro Zone:
In the first quarter 2022, seasonally adjusted GDP increased by 0.2% in the Euro area and by 0.4% in the EU, compared with the previous quarter, according to the statistical office of the EU.
USA:
"Gross domestic product in the U.S. declined at a 1.4% pace** in the first quarter, below analyst expectations of a 1% gain.
Declines in fixed investment, defence spending and the record trade imbalance weighed on growth.
Consumer expenditures rose 2.7%, but that came amid a 7.8% increase in prices." (8)
** I'm not sure what "pace" means; 1.4% is a higher value than the -0.4% I quoted above from the OECD source and could be an annualised rate of decline for the quarter.
Compared to the G20 the UK achieved a creditable performance in Q4 2021 when the UK performance was on a par with the OECD total, despite the impact of Omicron. (9)
A2. Employment
The ONS estimate that payrolled employees for April 2022 shows a monthly increase, up 121,000 on the revised March 2022, to a record 29.5 million. Total actual weekly hours worked increased to 1.04 billion hours in January to March 2022, 10.7 million below pre-coronavirus pandemic levels principally due to high economic inactivity by those aged 50 to 64 years who have chosen not to return to work after the pandemic. Since the start of the pandemic, the number of self-employed has fallen by nearly 600,000. (10) (11)
Despite increasing UK employment the number of vacancies in February to April rose to a new record of 1,295,000, up 33,700 on the previous quarter and 499,300 compared to pre-pandemic levels in January to March 2020.
On 14th April Reuters reported:
"London's financial job market continued its post-pandemic growth spurt in the first quarter of 2022, showing resilience despite rising geopolitical tensions and soaring inflation.
"Jobs available in the first quarter of the year increased 73% compared with the same period of 2021, according to recruitment consultancy Morgan McKinley.
Its latest findings are in line with the rest of the UK, where unemployment has fallen to its joint lowest in almost 50 years.
"Workers who moved positions in London's financial industry enjoyed a 22% salary change on average, indicative of the short supply of candidates available within the sector, according to Morgan McKinley." (12)
There has been constant references by those opposed to Brexit to the London City losing business to the EU financial centres. Undoubtedly the UK leaving the EU will lead to many companies to restructure, but the reality is jobs are increasing in the City and companies are moving in both directions. The German lender, Berenberg, is shifting a team of investment bankers from Europe to the City, including a number of bankers transferring from its offices in Frankfurt and other locations.
Earnings:
UK total earnings growth rose to 7% in March from 5.6% in February, but regular earnings growth excluding bonuses only increased by 4.2%. Adjusted for prices, average earnings excluding bonuses fell by 1.9% from a year earlier. The UK is not alone in having falling real income; most of the developed countries have wage growth less than current rates of inflation. Even France with one of the lowest rates of inflation, only has wage growth of c.0.5%. (13)
A3. Unemployment
Rates for March 2022 as reported by OECD (14):
Japan 2.6%, USA 3.6%, UK 3.7%, Germany* 5%, Canada 5.3%, France 7.4%, Italy 8.3%, EU 6.2%, Euro area 6.8% . *(15)
The UK unemployment rate declined to a 48-year low in Q1 to 3.7%, its lowest level since 1974. For the first time ever, there were fewer unemployed people than job vacancies.
A4. Inflation
Japan 1.2%, France 4.8%, Australia 5.1%, Italy 6%, Canada 6.8%, Euroarea 7.4%, Germany 7.4%, Spain 8.3%, USA 8.3%, UK 9%, Netherlands 9.6%. (16)
World wide inflation is probably the most uppermost issue in people's minds today. It is being driven by energy and fuel cost increases and shortages as the world economy expanded out of the pandemic and the outbreak of war in Ukraine. The oil price started escalating from a low level at the start of the pandemic and has been steadily rising for over two years. Wholesale gas and electricity (driven by gas price) prices started escalating rapidly as the world started to come out of the pandemic approximately 12 months ago. These prices did not immediately impact on the general public in the UK as the domestic price of energy is capped by the government, but they did affect industries and business costs. It was not until the lifting of the capped domestic prices in October that the public started to seriously affected by energy costs. Meanwhile other factors such as shortages as the world came out of the pandemic impacted on prices. In the case of gas there was a shortage last summer due to stopping production at some facilities to carry out essential maintenance that had not been carried out in the pandemic. A shortage of microchips led to a shortage of new cars that in turn inflated the price of second hand cars, which is a significant factor in the inflation index. Then the outbreak of war in Ukraine caused further shortages and finally in April 2022 the price cap on domestic energy costs was lifted again for UK domestic consumers. (17)
Another inflationary factor has been wage increases since the pandemic culminating in many pay rounds being settled in April 2022 and a significant increase of 6.6% in the UK National Living Wage. (18) Being a mainly service orientated economy, the UK inflation is more affected by employment costs than a capital intensive manufacturing economy like Germany.
Another factor affecting inflation is the war in Ukraine; which, apart from energy costs and shortages such as nickel, sunflower oil, grain, etc., is, as is usual in times of war, causing investors to move into gold and the US $. The $ has increased markedly against 6 major currencies including the £ and Euro resulting in price increases on those goods traded in $s. (19)
Mention should be made of why France's inflation rate is so much lower than the rest of the G7 apart from Japan. In France about two-thirds of power comes from Électricité de France’s nuclear plants, the electricity component of inflation has risen by just 4% in the past 12 months, compared to an average of more than 27% in the eurozone generally. Macron's decision last year to limit the amount by which France’s largely state-owned energy companies could raise prices has benefited French consumers and taken some of the inflationary pressure off industries that depend on gas and electricity. Conversely the UK government has passed on much of the wholesale increase in energy prices to customers and help those most in need in other ways such as help with domestic customers and house holders rates. Another factor that has helped to keep inflation low in France is lower wage increases than the rest of the G7.
There has been little action by the UK government to counteract inflation such as removing VAT on fuel. Italy has a windfall tax on energy firms and is spending £6.8bn to shield consumers from higher bills. Spain and Portugal are capping gas prices after winning approval from the EU. Germany has cut fuel tax by 30 cents a litre, compared with a Britain’s 5p cut. Ireland has cut public transport fares by 20%, while Spain and Belgium have cut VAT on energy bills. The Netherlands have also introduced a package of measures and their inflation dropped from 9.7% in March, the highest in 47 years, to 9.6% in April still higher than the UK level.
At least so far the Bank of England have not needed to take the drastic action the Poles and Hungarians have to counter inflation:by raising interest rates to over 5%. (20)
A5. Trade
UK trade continued to grow during Q1 with goods exports to the EU rising significantly, progress on new trade agreements, and in January the UK applied to join the huge Pacific free trade area CPTPP.
In February and March goods exports to EU exceeded £15b each month, comparable with £46.4b goods exports to EU in Q1 2019 and even exceeding December 2020 when goods were queuing at the ports trying to beat the end of the transition period in anticipation of the possibility of no trade deal with the EU. (21)
In the last two quarters UK trade has returned to pre pandemic levels. (22)
Whilst goods trading has largely recovered from the pandemic, services exports rose to c.£80b in Q1, which is shade below the average quarterly services exports in 2019, the record year. The service balance of trade reached £12.4b in March the highest positive trade balance for services in history for the UK. This is because services imports are still well below 2019 levels. (23)
The FT reported in December: "
The US has overtaken the EU as the leading destination for UK financial services exports".
Q1 2022 has seen consumers’ desire to travel once again causing 2022 weekly booking rates to be twice as high as what was seen in 2020 or 2021. As guidelines ease, travel is seeing a boost globally. March saw the highest volume of traffic in over two years, with a 142 per cent increase over March 2020. Increased bookings are being driven by consumer desire to make up for lost travel time, especially for the two in three (65 per cent) who had a trip cancelled due to the pandemic. The World Travel & Tourism Council’s latest Economic Impact Report reveals the travel and tourism sector in the UK is expected to create nearly 700,000 new jobs over the next decade. (24)
In February the UK and Singapore agreed a new innovative digital trade deal. This Digital Economy Agreement is far reaching and will set new standards and a new era for trade rules, cutting costs and red tape and pave the way for new era of modern trade. It is a first for a European nation and supports the UK bid to join Singapore and 10 other nations in the Trans-Pacific Partnership (CPTPP). Membership will facilitate access to a £8.4 trillion free trade area with vast opportunities for UK business.
In March the government announced financial support for the negotiations and implementation of the African Continental Free Trade Area trading bloc.
Scottish salmon exports for the 12 months to January 2022 were up 42% to 99,400 tonnes. January saw a substantial volume of trade despite stormy weather and continuing concerns over the Omicron variant of Covid. The EU accounted for 63% of the volume of global Scottish salmon exports in the month, with France the dominant European market. The sector has also been celebrating the 30th anniversary of Scottish salmon operating with the Label Rouge quality mark in France.
In April it was announced that a world-first centre dedicated to accelerating the digitisation of international trade is to be set up in the North East. The Centre for Digital Trade and Innovation will be coordinated by the International Chamber of Commerce UK and supported by the Tees Valley Mayor and Combined Authority, industry and Government.
The centre, working closely with the Teesside Freeport, will provide a focal point to bring together initiatives and expertise that will enable industry to develop the latest technologies and approaches to trade, removing barriers to growth.
The aim is to make the UK the first country in the world to establish the private sector infrastructure which will lead research and pilot and test new approaches to trade.
It is expected that digitisation could cut trade costs by 80 per cent and generate £25bn of SME export growth and an additional £1bn in SME trade finance, halving the country's trade finance gap.(25)
April also saw the start of work towards a new trade deal with Switzerland, the UK's 10th largest trading partner. (26) There are many opportunities for synergies between the UK and Swiss business including banking and other financial services, digital trade, and pharmaceuticals. Switzerland is credited with being the most innovative country in the world, something at which the UK also excels.
To conclude on trade, I repeat I am a free market Brexiteer, and believe we should remove as many trade controls, tariffs, quotas as possible. In this respect sovereignty is about a government having the freedom and power to implement what controls it chooses. If the UK government chooses not to implement reciprocal controls on imports from the EU, that is exercising its sovereignty, which would not be the case if the UK was a member of the EU and forced to implement EU regulations on trade.
A6 Finance
Investment
One of the few predictions that those opposed to Brexit got right in 2016 is that a vote to leave the EU would impact adversely on investment. Investors held back until the UK left the EU with a trade deal and the picture became clearer. On leaving the EU, investment resumed at pace as I posted on pages 1,429 and 1,440 above. This has been particularly true for gross fixed capital formation. 2021 was a record-breaking year for the UK’s growth capital market. So far, 2022 is following in the same vein, with Q1 breaking the record. (27) (28)
Central London investment volumes totalled £5.1 billion in Q1 2022, the highest ever for a first quarter, according to provisional data from global real estate advisor, CBRE. (29)
4 million sq. ft. of office space was granted planning in London’s financial district last year, 70 per cent up on 2020; there are an incredible 587 'tall buildings' in the pipeline in London - with 310 granted full planning permission and 127 under consideration, according to New London Architecture's annual review last December.
In March the government announced that the UK’s aerospace technology research programme, the Aerospace Technology Institute, is to receive record levels of government funding of £685m for the financial years 2022-2023 through to 2024-2025, an increase of £235m on the previous three-year period. Industry will provide co-funding, taking the total to more than £1bn.
Funds will be used to capitalise on the UK’s world-leading R&D system and support the development of zero-carbon and ultra-low-emission aircraft technology, cementing the UK’s place at the forefront of advancing new green technology, whilst supporting tens of thousands of jobs.
Global bio-pharma company, Jazz Pharmaceuticals and its subsidiary, GW Pharmaceuticals, a leading manufacturer of cannabis-based medicines has officially begun construction of a new, state-of-the-art £75m manufacturing facility at Kent Science Park in Sittingbourne.
As I have posted previously the UK population of foreign students is growing rapidly and hit the 2030 target of 600,000 ten years early. (30) This is creating a boom for providers of student accommodation. A student accommodation development company, Leeds based Urbanite Living, has announced a £1bn partnership with Prescient Capital to deliver over 6,500 student bedrooms in the next three to five years. Urbanite Living has built over 3,500 student bedrooms across Sheffield, Glasgow, Birmingham, Leicester as well as Leeds and York, and is now targeting further student accommodation schemes in key university cities across the UK.
In March Dealroom, the data provider on start-ups, growth companies and tech ecosystems, announced it has analysed findings for the UK’s Digital Economy Council that suggest the UK’s digital economy is now worth more than double that of Germany’s and almost five times larger than France and Sweden. In addition to this, the industry is now worth $1trillion in value, as the country’s tech sector becomes the third in the world to ever reach this landmark valuation (after USA & China). (31)
The number of new tech companies incorporated in London jumped 94% to 18,549 in 2021, representing 49 per cent) of all new tech businesses in the UK last year.
At the SME end of commerce it is encouraging that despite adverse economic head winds, many people are considering starting their own business. Nearly 13% of UK adults are running fledgling businesses, according to research, the highest percentage since the late 1990s. (32)
B Political Change
The government announced 38 bills in the Queen's Speech, the second highest number of bills announced for a parliamentary session in the last three decades and only exceeded once in 2005.
B1 Environment
In March the government announced a scheme for households and businesses across England to benefit from greener heating. A Green Heat Network Fund provides grants to deliver clean heating to homes, offices, commercial and public buildings via £288m in grants over the next three years. The fund is expected to reduce carbon emissions equivalent to taking 5.6 million cars off the road for a year.
B2 UK - EU Relations
Whilst the new UK-EU relationship continues to be strained over a number of matters, notably Northern Ireland, it is also apparent that as we entered the second year of Brexit there is a softening on a number of issues.
The French tax authorities have announced that UK residents and British expats in France will no longer have to pay French social charges (prélèvements sociaux) at the full rate of 17.2% provided that they are already affiliated to the UK social security system and are not dependent on the French system. This includes existing and future S1 holders, such as British pensioners whose healthcare is paid for by the UK state. From now on, these people will be charged only the 7.5% solidarity charge as when the UK was in the EU. This is particularly good news for those Brits renting out a gîte or selling a second home in France.
Whilst visa free touring of the EU by British musicians is still not permitted, a new dual registration policy will enable British specialist hauliers, including those that transport equipment for concert tours and cultural events, to travel freely between the UK and the EU post-Brexit. The new rule, which will come into effect from late summer, is a boost for UK musicians heading out on tours of EU countries with music equipment, with hauliers now set to be able to make unlimited international trips. Previously, British specialist hauliers had been limited to only three EU stops per tour since the UK left the EU. Under new rules, haulage companies will also not be required to pay Vehicle Excise Duty in the UK for six months.
In April the Portuguese government opened a special e-gate channel for British tourists enabling them to be fast-tracked seamlessly without having to queue for hours for manual checks as previously required when treated as "third country" visitors. Hopefully, Spain, Greece, and Italy will follow suit, after all it is only in the interests of their own tourist industry, and the four countries are currently in a fierce battle to attract British tourists following a post-pandemic surge in holiday bookings, weekend trips and other vacations.
French President Emmanuel Macron used a speech on Europe Day, May 9th to put forward a sweeping proposal to redraw the political map of Europe with a new organization that would give Ukraine a closer relationship with the EU short of membership — and could even include the U.K, calling it a new
“European political community,” which would include both members and non-members of the EU. The irony is that had the EU granted David Cameron a "looser" relationship for the UK within the EU, Cameron might have had more to offer the electorate in the 2016 referendum and got the result he wanted.
The squabbling with France over fishing was largely concluded, however the EU published a paper in April on the fishing quota agreement, within which it says "
Access for EU vessels to UK waters is maintained for an adjustment period lasting until 30 June 2026, but the conditions after this date remain uncertain." I wonder what the EU is expecting? (33)
B3 Defence
Despite ongoing disagreements with the EU, the UK and France are working together to develop a new missile. (34)
C European Union Trade Affairs
These are presently dominated by the war in Ukraine and the dependence the EU has on Russia. It is an unfortunate fact that the EU is rapidly increasing its dependence on China. Between January 2020 and December 2021, EU imports from China increased by 55.2% while imports from other non-EU countries increased by 18.6%. EU exports to China increased by 9.9% while exports to other non-EU countries increased by 4.4%. (35)
Regrettably the UK is also rapidly increasing imports from China. The main imports are office machinery, telecommunications and sound equipment, and general manufactured consumer goods. Exports to China have declined since 2019 making the UK less dependant on China for exports. (36)
It is not surprising to see that after a breakdown in trade negotiations with India in 2013, the suspension of plans for an EU-China Investment Agreement last year, and the UK's progress in initiating trade talks with India, that the EU is now initiated action to re-open discussions with India and agreed to establish an EU-India Trade and Technology Council.
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