Brexit 2nd Year 3rd Quarter progress to date (26.11.2022)
This is the sixth post in a series of posts listed in Appendix 1, where I endeavour to report UK performance and events since the UK left the EU.
A1 GDP Growth Q3 2022
G7: US 0.6%, Italy 0.5%, Canada 0.4%, Germany 0.3%. France 0.2%, UK -0.2%, Japan -0.3%
Other countries: Netherlands -0.2%, Spain 0.2%, EU 0.2%, Euro area 0.2%, (Reference 1)
I usually post a warning at the start of my review about the accuracy of data (see now Appendix 2). A prime example of how suspect data can be, occurred on 30th September when the ONS issued a revised set of UK statistics for GDP for quarter 2 2022. (Ref. 2)
As I have repeatedly advised in these reviews, all statistics are subject to corrections, even over a year later. Monthly statistics are at first a "best estimate" with lots of assumptions, which are usually cautious. The release on 30th September was very significant in that ONS statistics now show that the UK GDP contracted by a downwardly revised 11.0% in 2020, reflecting the effects of coronavirus restrictions. This is to say that the impact of the pandemic on UK GDP was worse than previously thought.
The report also states that the UK GDP is now estimated to have expanded by an upwardly revised 7.5% in 2021. Thus the 2021 GDP increase in GDP after leaving the EU was higher than any of the other G7 nations which, according to the World Bank (Ref. 3) were :
France 7%, Italy 6.6%, Canada 4.6%, USA 5.7%, Germany 2.9%, Japan 1.6%
The greater negative impact of the pandemic on the UK GDP in 2020 means that the UK still has some way to go to get back to the pre pandemic level, which was previously thought to have been achieved in November 2021 prior to the negative impact of the Omicron variant in December 2021.
The ONS have not as yet revised its report
"International comparisons of GDP during the coronavirus (COVID-19) pandemic" issued on 1st February 2021 (Ref. 4) which sets out details of how the UK GDP was affected by the pandemic relative to the other G7 nations. Although the UK GDP has increased by more than the rest of the G7 countries, apart from US, since the depth of the pandemic impact in April 2020, the improvement has not yet been sufficient to get back to the pre- pandemic GDP level.
The economy is cyclical and different countries are at different stages in their own cycle. Comparing the performance of different countries can be skewed according to the time period chosen. Following the ONS Q3 GDP report, there has been extensive criticism that the UK has not recovered to pre-pandemic levels and naturally Brexit has been blamed. This is true, but only in the sense that comparisons is being made with quarter 4 2019 when output was boosted by companies stockpiling in anticipation of no deal with the EU. (Ref. 5)
Quarter 4 2019 was also an exceptional situation for the UK of abnormally low goods trade deficit as companies rushed to build stocks in anticipation of there being no trade deal with the EU. (Ref. 6) In its GDP Quarterly report for Q4 2019, the ONS stated "
the UK posted a trade surplus of 1.4% of nominal gross domestic product (GDP) in Quarter 4 2019 ..... This trade surplus is larger than previously estimated." This is extremely abnormal for the UK, having only ever achieved a trade surplus in one month in the previous 22 years (Ref. 7)
Mark Carney the former BoE head stated that Brexit "
could knock the pound sharply lower, stoke inflation and raise unemployment" (Ref. 8) in May 2016. One out of three forecasts proved correct. The value of the pound did fall with the referendum result, which is hardly surprising as "the markets" don't like "the unknown", but it has remained relatively stable since 2016 until the Truss fiasco. It became apparent to the money markets that Brexit hasn't caused any recession or unemployment. It has taken a worldwide pandemic, the effects of which are still being felt in China, and a war in Europe to cause high inflation and slow down of economies. Those opposed to Brexit still maintain that Brexit has made the present worldwide downturn worse for the UK, but that depends on what period you examine.
If the period since Carney’s 2016 statement is examined, there is no discernible Brexit impact; for example the cumulative UK GDP growth following the referendum, when most critics claim deterioration began, from Q3 2016 to Q2 2022 was 6.8%. During the same period Germany's growth was 5.5% and Italy's 4.2%. Only France of the European G7 countries exceeded the UK slightly at 7.6%. It is patently clear that following the the referendum, and following Brexit, despite the UK suffering the worst Covid impact, Brexit has not significantly damaged the UK economy as a whole.
The revised ONS Q2 2022 report in September also revised the Q2 UK GDP performance which is now estimated to have
increased by 0.2%,
upwardly revised from a first estimated contraction of 0.1%.
The graph in reference 9 (select 25Y), clearly shows where the 2008 financial crisis was and the far more severe impact of the 2020 pandemic, but little or no indication of a negative Brexit impact.
UK's Q3 GDP first quarterly estimate shows an estimated fall of 0.2%. (Ref. 10)
This was largely attributed to a fall of 0.6% in September 2022 which was, in turn, largely due to a 0.8% fall in in the services sector. The ONS stated the performance "
was affected by the bank holiday for the State Funeral of Her Majesty Queen Elizabeth II, where some businesses closed or operated differently on this day." The ONS stated that the main impact on the quarter 3 performance was a 1.5% fall in production. The September report also included a GDP statement that there was "
a fall of 0.1% in August 2022 (revised from a fall of 0.3% in our previous publication)". Retail trade has fallen 10 times in the last 11 months due to the effect of rising prices and the cost of living on sales volumes.
Construction output rose 0.4% in September despite an overall fall in UK GDP, the third consecutive month of growth for the sector. September 2022 shows the highest level of construction output (£15,125 million) since records began in January 2010. (Ref. 11)
Barratt Developments UK's biggest house builder posted a record annual profit for the fiscal year 2022 in September and said it was on track to meet volume output target for 2023 fiscal year. (Ref. 12) The number of UK new house starts in H1 was 51,730, the highest for well over 30 years, (1988). (Ref. 13)
The manufacturing PMIs of the UK, Germany, France, and Italy show similar profiles during 2022. The UK manufacturing PMI ( the index of the prevailing direction of economic trends in manufacturing) started to decline in February and dropped below 50 in August, averaging 49.1 for Q3. The French manufacturing PMI follows a similar profile, starting to decline in February and averaging 49.3 for Q3. Germany's manufacturing PMI also started to decline in February, but was significantly worse averaging 46.9 in Q3. Germany's manufacturing sector contracted in July for the first time in over two years, (Ref. 14) Italy's manufacturing PMI started to decline before the other three European G7 members in November 2021, but has declined less quickly and averaged 48.3 in Q3.
The significance of these events in 2022 is that the UK's decline in manufacturing PMI this year has been almost identical and certainly no worse than the other European G7 members. Consequently claims of a UK economic "car crash" due to Brexit are nonsense.
The UK Services PMI ( the index of the prevailing direction of economic trends in services) shows a slightly different situation. The index peaked in March and declined through the summer but did not fall below 50. (A PMI over 50% indicates expansion.) Conversely Germany's Services PMI peaked in April and declined rapidly to less than 50 (average c. 47.5) throughout Q3, indicating a contracting service economy. France's services PMI also peaked in April and declined to an average 52.4% in Q3. Italy's services PMI was similar to Germany.
The significance of these events in 2022 is that the UK's decline in services PMI this year has been similar to France and not as bad as Germany and Italy. Consequently claims of a UK economic "car crash" due to Brexit are nonsense.
UK vehicle manufacturing started to recover strongly in Quarter 3. SMMT reported that, following a year of depressed output due to microchip shortages, UK car production started to recover in May with consecutive monthly increases through to August and then fell away again in September. Output is still well below 2019 levels and manufacturers are struggling with high input costs particularly energy. On the brighter side, according to Autocar, electric car sales are at a record level with c.80% exported, representing a third of car export sales. Commercial vehicle (CV) production rose 92.9% in August, marking the best August since 2012 and the eighth consecutive month of growth. Overseas demand increases 78.4%, while production for UK operators more than doubled year-on-year, rising 119.3%.
Year-to-date CV output is up 50.3% at 64,828 units in the best year-to-date since 2012.
The UK’s light commercial vehicle market rose 10.8% in September, marking the first month of growth in 2022. (Ref. 15)
The Q3 GDP data release has been met by criticism, but people should be aware that the numbers are latest estimates and are very volatile. For example, the US quarterly growth was the highest of the G7 after two consecutive quarters of decline, and rose of 0.8% quarter on quarter. Conversely Canada has seen a sharp drop of 0.7% quarter on quarter, Japan dropped 0.8%, and the Netherlands dropped 2.8%! By comparison the UK's GDP could even be described as stable!
Breaking NewsI'm advised by one of my local vineyards that 2022 is set to be a record year for UK wine producers.
Recession
The word "recession" is being constantly misused this year in the media and by posters on this MB. A few commentators are more cautious and talk of the UK "
entering recession". The Forbes view is that during the summer of 2022, American politicians, economists and market professionals engaged in a great semantic debate over whether or not the U.S. economy was in recession. The argument, invariably influenced by politics, came down to how you defined the word recession. According to the general definition, two consecutive quarters of negative GDP, the U.S. technically entered a recession in the summer of 2022 due to declining GDP in Q1 and Q2. The organization that defines US business cycles, the National Bureau of Economic Research, took a different view. According to the NBER’s definition of a recession, namely a significant decline in economic activity that is spread across the economy and that lasts more than a few months, the US was not in a recession in the summer of 2022. Tim Holland, chief investment officer at Orion Advisor Solutions has stated
“We have a hard time believing the economy is in recession today, given a strong labour market and corporate earnings growth. We also remind ourselves that recessions are uncommon, as our [US] economy was in recession just 8% of the time over the past 30 years.”
I concur with this view and believe the return to growth of the US economy in Q3, which has jumped from lowest growth of the G7 nations in Q2 at -0.2%, to highest growth in Q3 at 0.6%, supports Holland's view. We are in extraordinary times following the massive worldwide impact of the pandemic on the world's economies, which have not only led to shortages of many things, but also led to a huge change in behaviour with a vast number of people choosing not to return to work after the lockdowns. According to the OECD earlier this year, across its 38 member countries, 20 million fewer people are working now compared to before the pandemic. The return of inflation due to the war in Europe has added fuel to the fire. I recently read
"The past two years have brought about epochal change in the world and there will be no return to the "normality" we once knew."
Regarding the UK, it is now apparent that Q2 was not a decline in GDP, consequently the UK has not yet experienced two consecutive quarters of negative GDP, and the UK is still experiencing full employment with a large number of job vacancies. It could also be argued that any negative impact on GDP is not simply due to inflation, rising interest rates, and other economic factors such as post pandemic shortages, but also reduced economic activity due to fewer people choosing to work, an extra bank holiday, and industrial disputes.
2023 is on course to be a record year for Corporate Profits with this year's three quarters profits being the highest three in history.
Annual GDP performances according to World Bank national accounts data, and OECD National Accounts data files. (Ref. 16)
2021 UK GDP was 3.19 trillion current US$ The highest ever in UK history.
US 23 trillion, Germany 4.22 t, France 2.94 t, and Canada 1.99 t - also the highest ever in history
Japan 4.94 t - 11th highest in its history, Italy 2.1 t - 8th highest in its history
Regarding 2022, I draw the readers attention to the article in reference 17 about Saudi Arabia, which states Saudi is the world’s fastest-growing major economy in 2022. That is as maybe and is no doubt attributable to energy inflation, but it is interesting to see which G7 countries are the highest in the list. UK and Canada lie in sixth place after India, Indonesia, Spain, and China. Spain has seen a large recovery of its holiday trade post pandemic.
A2 Employment
The UK pay-rolled employees for October 2022 continuing to increase to a record 29.8 million. Self-employed workers increased but is still well below pre-pandemic levels. (Ref. 18)
In August to October 2022, the estimated number of vacancies fell by 46,000 on the quarter to 1,225,000. Growing numbers of workers over 50 are returning to work and taking on jobs in the UK’s pubs, restaurants and hotels in order to boost their retirement income as the sector’s labour shortage and rising cost of living prompts a shift in its workforce. The latest Caterer.com Hospitality Hiring Insider, which analyses job ad data and the views of 600 hospitality professionals, has found that more than 130,000 over 50s, "the silver spooners", are taking jobs to supplement pensions. (Ref. 19)
A second reason for the fall in vacancies is the high level of immigration to the UK, including 331,200 were for work in the year to June. (Ref. 20)
Earnings Growth September 2022 Ref. 21
G7: US 8.22%, UK 6%, Canada 3.2% , Japan 2.1%, Italy 1.1%, France Germany
Other countries: Netherlands 3.56%, Euro zone , EU , Spain ,
Data for earnings growth on the tradingeconomics site is incomplete with respect to Germany and France. I have found data on Notayesmanseconomic's Blog (Ref. 22)
This source states October wages increases were 5.2% for Euro zone, Germany 7.1%, France 5%, Italy 4.2%, Netherlands 4%, and Spain 3.5%.
UK regular pay rose by 5.7% in the year to September, the fastest growth since 2000 excluding the pandemic, when some people got big rises when returning to work from furlough. Average total pay (including bonuses) was 6.0%, Nevertheless there is considerable industrial unrest this year at the level of wage increases/offers driven by the current high inflation and historical issues such as previous low wage increases since the 2008 recession.
Real Wage Growth, i.e. Earnings Growth - Inflation-rate Sept./Oct. 2022
G7: US 0%, Japan -0.9%, France -1.2%, Germany -3.3%, Canada -3.7%, UK -4.1% %, Italy -4.7%,
Other countries: Spain -3.8%, Euro zone -5.4%, Netherlands -10.94%,
There needs to be caution in taking the numbers from different sources for different months as accurate, but clearly despite higher inflation, UK real wage "growth" is less worse than the Euro zone, but not as good as the G7 countries, apart from Italy.
The Financial Times has stated "
Wage growth has been more modest in the Eurozone than in the US and UK, where unemployment rates are lower and post-coronavirus pandemic labour shortages more acute."
The shortage of labour hit the headlines recently when prominent Brexit supporter Lord Wolfson called on the government to relax immigration rules to allow more immigrants to fill vacancies. Some blame the shortage on Brexit but the reality is the labour shortage is due to people not returning to work since the pandemic which is common across the Western world. Even if the UK remained in the EU, there is no guarantee the those EU workers who returned to their homeland during the pandemic would have returned to the UK because there are job shortages across the EU, most notable in France, Germany, Austria, and Finland. Even in Spain, where the unemployment rate is 12.6%, companies struggle to find workers. Gerhard Huemer of SMEUnited has said: “
What we see most of is Eastern Europeans having returned home during the pandemic and choosing not to head back to Western Europe now.” (Ref. 23)
In Eastern Europe there are also problems with labour shortage due to a different reasons. Poland's economy is growing fast, there is record low unemployment and many Ukrainian construction workers living in Poland have left to defend their country against the Russian invasion.
If Lord Wolfson thinks he has a problem, according to Germany's Institute for Employment Research there are 1.74 million vacancies in Germany! (Ref. 24) I would suggest Lord Wolfson's real problem is that like many employers he is used to running his business on the back of low paid employees while he fills his pockets, and it is not the Brexit he wants because it has put an end to that and he is being forced to increase his labour costs. .
A3. Unemployment September 2022 Ref. 25
G7: Japan 2.6%, UK 3.6%, US 3.7%, Canada 5.2%, Germany 5.5%, France 7.3 %, Italy 7.9%
Other countries: Netherlands 3.8%, EU 6%, Euro area 6.6%, Spain 12.67%
The UK unemployment rate for the third quarter decreased by 0.2 percentage points on the quarter to 3.6%. (Ref. 26)
A4 Inflation September 2022 Ref. 27
G7: Japan 3%, France 5.6%, Canada 6.9%, US 8.2%, Italy 8.9%, Germany 10%, UK 10.1%.
Other countries: Spain 8.9%, Euro area 9.9%, EU 10.9%, Belgium 11.27%, Netherlands 14.5%
Inflation October 2022 .
G7: Japan 3.7%, France 6.2%, Canada 6.9%, US 7.7%, Germany* 10.4%, UK 11.1%, Italy 11.8%.
Other countries: Spain 7.3%, Euro area 10.6%, EU 11.5%, Belgium 12.27%, Netherlands 14.3%
* Germany's harmonised inflation is reported to be 11.5% (Ref. 28)
The UK continued to be one of the worst performer of the G7 on annual inflation, driven by the largest contribution from housing and household services/energy. The second largest contribution came from food and non-alcoholic beverages. It should be noted that there are many countries in Europe with higher inflation than the UK.
During the last month of the quarter, after a protracted leadership contest, the new government announced the winter cap on domestic energy charges and later in the month finally announced a limitation on business energy costs. This compares poorly with France who announced in September 2021 a freeze on gas prices for the winter 21-22, and capped an increase in electricity prices for both domestic and business users. (Ref. 29)
Whilst the general public are well aware of the high inflation in energy and food prices, there are many less aware of the huge inflation in building materials that are seriously impacted by energy costs. Items such as ready-mix concrete, bricks, flagstones, blocks, and tiles have risen by higher inflation than food and general inflation, and steel bars for concrete reinforcement have risen by over 50%.
The repeated increases in base interest rate by the BoE finally started to impact with monthly house price inflation which was nil between August and September, factoring in seasonal effects. This is the first time, since July 2021, that house prices had failed to rise month-on-month. Contrary to the 2016 Chancellor's project fear forecasts that a vote for Brexit would cause house prices to fall. (Ref. 30), house prices have continued to rise every year since 2011, the start of the recovery from the 2008 recession.
The high inflation is an international phenomenon, sending price increases to a near 40 year high in the US, and the highest for 70 years in Germany, who are the masters of controlling inflation in normal times. France continues to outperform the other larger countries of Europe due to its policy of capping energy prices in 2021. (Ref. 31)
Food inflation rates September 2022 (Ref. 32):
G7: Japan 4.2%, France 9.9%, US 11.2%, Canada 10.3%, Italy 11.7%, UK 14.5%, Germany 17.7%.
Other countries: Euro area 13.8%, Netherlands 12.7%, EU 15.4%, Spain 14.4%.
Food inflation rates October 2022:
G7: Japan 6.2%, France 12%, US 10.9%, Canada 10.1%, Italy 13.5%, UK 16.2%, Germany ? %.
Other countries: Euro area 15.5%, Netherlands ?%, EU 17.26%, Spain 15.4%.
"Across Europe, soaring inflation is behind a wave of protests and strikes that underscores growing discontent with the spiralling cost of living and threatens to unleash political turmoil" said the Independent on 2nd October (Ref. 33) The article runs through the problems of various European countries and for once the Independent doesn't mention Brexit!
There are claims by those opposed to Brexit that Brexit is attributable for 6% of the food inflation. If that were true then UK food inflation would be c.10%. Does anyone really believe that UK food inflation would be one of the lowest rates if Brexit had not happened and lower than many of the countries we get our food from? Half of UK food is imported, of which two thirds is from the EU, mainly from countries whose food inflation is over 10%.
World Inflation of Prices and Interest Rates
On 31st October Eurostat, the EU's statistics agency stated Euro zone annual inflation reached 10.7% (sic) in October. That is up from 9.9% in September and the highest since statistics began to be compiled for the Euro zone in 1997. Eurostat figures show prices for food, alcohol and tobacco have increasingly joined energy prices as a major contributor, rising 13.1%, while energy prices rose an astronomical 41.9% from a year earlier. It has led the European Central Bank to raise interest rates at the fastest pace in its history with back-to-back three-quarter point increases at its Oct. 27 and Sept. 8 meetings.
World inflation was triggered by shortages as the world started to come out of the pandemic. These include labour shortages around the developed world which has led to higher wage increases. The stringent pandemic measures in China has also led to some shortages and increased prices. On top of all these issues, the main factor affecting world inflation is the war in Ukraine, which has also created shortages notably energy and food. The war has also has caused investors to move out of other currencies into the US dollar. The U.S. dollar has also strengthened because the US Federal Reserve adopted a hawkish monetary policy stance in response to inflation, repeatedly increasing interest rates. (Ref. 34)
To counteract these impacts the BoE has raised interest rates and the ECB has stopped buying debt and, as stated above, started raising interest rates by record amounts since the Euro was introduced. (Ref. 35)
The Canadian economy has done quite well out of the surge in energy prices as an exporter of energy. Nevertheless since March the Bank of Canada has raised interest rates six times and is expected to continue to raise them.
Probably most surprising of all is that Japan, the major economy with consistently the lowest inflation and low growth, spent a record $42.8 billion on currency intervention in October to prop up the yen.
But despite this worldwide scene there are still people in the UK blaming Brexit for UK inflation.
The action of the BoE in repeatedly raising interest rates to curb inflation has received a great deal of media attention coupled with its effect on mortgage interest rates, but rarely if ever does the media refer to the interest rates in other countries which are often higher than the UK base rate. Rather than list comparable rates as they are constantly changing, I have posted a link below to the world's various interest rates for comparison:
tradingeconomics.com/country-list/interest-rate?continent=worldA5 Trade
All quarterly goods trade continues to be at record levels driven by inflation and high energy costs. (Ref. 36)
Exports to the EU are at record levels driven by energy, inflation, and increase exports of machinery and transport equipment which have exceeded £15b in the last two quarters, Q3 being the second highest on record and only exceeded in Q1 2019. (Ref. 37)
Whilst trade figures for goods are distorted be high energy costs and inflation, it is pleasing to see record exports of services at their highest in UK history. (Ref. 38)
In July it was announced that Scotland is getting its first direct container link with China in a new service that promises to cut transit times by nearly half by bypassing the EU eliminating unscheduled port congestion delays in Rotterdam. (Ref. 39)
Since Brexit, there has been misreporting of the impact on trade due to the so called "Rotterdam effect" which, when the UK was in the EU, overestimates the exports to the EU and under estimates exports to the rest of the world. Now the UK is no longer in the EU, exports that pass via Rotterdam (and Antwerp) are no longer counted as exports to the EU.
Since the UK left the EU the anti Brexit media has given considerable attention to the reduction in exports to the EU by SMEs particularly regarding food and drink, Personally I cannot get too concerned about loss of food exports when the UK has to import 50% to 80% of its food depending on how you measure it. The reasons for loss of food exports to the EU are numerous including EU red tape and restrictions such as veterinary certificates, reduced demand in hospitality due to the pandemic in 2021, reduced tourism/holidays by Brits to Europe in 2021, increased transport costs due to fuel cost (and availability in September 2021 due to panic buying), increased drivers wages, increased container costs and reduced container availability due to a log jambs around the world; the list is very long so it is easier for some simply to blame Brexit.
In March 2021 it was reported that one in four UK small exporters had halted EU sales, and the media has recycled the story repeatedly since then. What has not received much media reporting is the UK food exports to the EU have been slowly recovering and there has been strong growth in food sales to non EU countries, notably UAR, Canada, Australia, and India, which would have been higher but for the container shortage issue. Exports to Australia and New Zealand are up 16.6% and 18.4% respectively since 2021, with both now above pre-pandemic levels.
On 31st August The Food and Drink Federation announced that food and drink exports to both the EU and non EU in the first half of 2022 exceeded pre-pandemic level, (Ref. 40) reaching levels not seen since the 1990s. The Food and Drink Federation’s Head of International Trade Dominic Goudie said:
“It is promising to see exports to EU and non-EU markets top pre-pandemic levels given the exciting opportunities presented by new trade deals with Canada, Australia, India and the Gulf Cooperation Council. These are vital to driving future growth in the UK food and drink sector."
The value of red meat exports from the UK have reached all time record levels, worth a staggering £858 million in the first half of this year. For the first time in 20 years, the US lifted a ban on British beef imports in March, and in the first week in October the first shipment of Welsh lamb in decades to the US occurred.
The new London Underground Elizabeth Line was launched in May. This project has triggered a deal between UK government and Israel to share expertise in large scale rail projects. Negotiations began in July to upgrade the current trade deal, rolled over from the EU, with Israel, which has has the second-largest number of start-up companies in the world after the United States, and the third-largest number of NASDAQ listed companies after the U.S. and China. (Ref. 41)
In August the UK continued to exercise its increased sovereignty by launching a post-Brexit scheme to support trade with developing countries, extending tariff cuts to hundreds of products. The Developing Countries Trading Scheme goes further than the EU’s Generalised Scheme of Preferences it replaces, and is one of the world's most generous, applying to 65 countries in Africa, Asia, Oceania and the Americas, including some of the poorest in the world. (Ref. 42) This new scheme will see products from certain clothes to olive oil and tomatoes benefiting from lower or zero tariffs, as “taking back control” of UK trade policy.
The face of UK trade has already changed significantly in less than two years since leaving the EU.
The UK government has agreed trade deals with 71 countries - plus the EU27. Excluding the EU, trade with these countries was worth £240bn in 2021 and accounts for 63.2% of total UK trade. UK trade with the 71 non-EU countries increased by 16.5% in 2021, compared with trade with the EU27 which only grew 4.4% in the same period.
Most notably, total trade in goods and services between the UK and South Korea and between UK and India in the four quarters to the end of Q2 2022, increased by 31.5% and 37.1% respectively from the four quarters to the end of Q2 2021 reaching levels not seen for 8 years or longer.
Whilst the US remains the largest UK trading partner in terms of individual nations, the EU continues to command the bulk of UK trade. There is a fixation among those opposed to Brexit that the UK has torn up trade deals with the EU and abandoning trade. This idea is erroneous; the principle of trade gravity will hold true and the EU will always be a major trading partner of the UK. An HSBC UK survey recently found that 53 per cent of companies are targeting trade with the continent in spite of post-Brexit rules and renewed Brussels red tape. Over half the 2,000 companies surveyed said they were looking to grow business with the EU, whilst 37% said North America, 35% South East Asian, and 34% the Middle East and North Africa.
The FT stated in May that "
Trade between Germany and the UK has dropped sharply since 2016." I'm reminded that around the time of the millennium I was managing a works in Co. Durham in Tony Blair's constituency. For three years we made major efficiency improvements resulting in significant profit improvements, but in the fourth year, 2001, the wheels came off the business big time. The biggest customer that accounted for about a third of the turnover shut-down, another customer went into administration, another customer moved production to Germany, and foot and mouth disease destroyed the agricultural market. Towards the end of the year the final major customer had a major accident that reduced their production and our sales to them by a third. If you made it up, no one would believe it. We managed to keep going, went through many rounds of cost cutting, and got back to profitability after a couple of years. The reason I am relating this is because no matter how efficient a business is, it needs
customers.
One of the UK's main export customers is Germany. (Ref. 43) Exports to Germany have declined. Is this because of Brexit? The answer is no, as reference 44 shows the decline in German manufacturing. Exports to Germany have declined since long before Brexit or the referendum (Ref. 45).
Exports to the United States, the UK's largest trading partner, four quarters to the end of Q2 2022 increased 11.3% compared to the four quarters to the end of Q2 2021, but have not returned to 2019 levels; that is hardly surprising with the US having had two quarters of negative growth in the first half of 2022.
So what is the solution to boost trade? The answer is to focus our trade on the rapidly growing world economies like India. (Ref. 46)
But there is one "new customer" just across the Channel! The cost of UK energy imports has increased hugely during the last year, however on the opposite side of the coin the UK exported a record-breaking 5.5TWh of power, worth around £1.5 billion, to Europe in the second quarter of 2022, according to Drax Electric Insights (3.10.2022), making the UK a net exporter of electricity for the first time in over a decade, and, at 8% of the total electricity generation, the largest amount ever on record. (Ref. 47)
A6 Finance
Investment
Gross Fixed Capital Formation in the United Kingdom rose to over £100billion in each of the first two quarters of 2022, having fully recovered from the pandemic slump. (Ref. 48)
The UK Build to rent sector set a new record for investment in the first half of 2023 reaching £1.76 billion. (Ref. 49)
Last quarter I highlighted the investment in vertical farming; the Dutch sustainable agriculture specialists One Farm is the latest firm to seal a deal to build a vertical farm in the UK. It will turn a disused Suffolk warehouse into a facility for growing leafy greens; the UK imports about 80 per cent of its spinach, and is expected to produce its first crop in quarter 4. One Farm plans to develop 25 sites around the UK in anticipation of reduced agricultural production in France and Spain due to climate change. At least that is the official reason; I suspect they are anticipating that at some future date, the UK will impose the same import restrictions on the EU that the EU impose on third countries.
In June the vertical farming business Jones Food Company opened a new specialist state-of-the-art innovation centre in Bristol that will aim to end the UK’s reliance on imported soft fruits, herbs and cut flowers within the next 10 years. (Ref. 50)
It was also announced in June that Eider Vertical Farms had secured £50 million to fund five new facilities by 2024. (Ref. 51)
In July the UK financial services industry announced a seven-year high of 136 deals in the first half of 2022, up from 118 deals in the same period in 2021.
In previous reviews I have highlighted the investment taking place in agriculture and renewable energy. The Agricultural Revolution is still with us as indicated above, however during the last few decades we have entered into what some like Masuda and Dietel call the Information or Informational Revolution driven by the microprocessor, shrinking transistor size, internet, and optical networks. This is leading to what Klaus Schwab has described as the Fourth Industrial Revolution.
It has always been the case that the UK has been in the forefront of these developments. The UK is second only to the US in fintech innovation (Ref. 52)
The UK is the third most powerful country in the world in cyberspace. (Ref. 53) On 27th September, Perfect Image, Technique, and Cyphra announced a merger to form Cybit.
The UK is ranked third in the world for private venture capital investment into artificial intelligence companies and home to a third of Europe’s total artificial intelligence companies.
UK fintech investment took a significant drop in H1 compared with H2 last year which saw some huge individual investments. However investment is well above the pre pandemic H1 2019’s figure of $3.8b at $9.6b. Five out of the ten largest fintech deals in H1 2022 in the Europe, Middle East, and Africa region were completed in the UK. In September KPMG UK said: “
Despite a slowdown in UK fintech investment compared to last year, the UK remains at the centre of European fintech innovation with British fintechs attracting more funding than those in France, Germany, China, Brazil and Canada combined." (Ref. 54)
More than half of UK manufacturers (55%) have been significantly impacted when it comes to recruitment in the last year, many experiencing supply chain disruption, and two thirds (69%) citing issues with sourcing material and components.
The 2022 Manufacturing Agility Assessment recently revealed that nearly four fifths of companies had accelerated investment in products, people, premises and processes to mitigate world events – a 17% rise on the previous year. (Ref. 55)
Last quarter I reported that over 402,000 new businesses were registered in the UK between January and June 2022. Amazon recently published its UK SME Impact Report which highlights how SMEs selling on Amazon have created 250,000 jobs across the UK as a consequence of over 15,000 UK SMEs exceeding £100,000 in sales last year, and over 700 reached sales of £1m or more for the first time. (Ref. 56)
Yorkshire and the Humber saw the number of business start-ups registered in October rising by 16.2 per cent compared with September, the highest month-on-month increase of any region in the UK.
The research by R3, based data provided by CreditSafe, shows that in October, 4,590 new businesses were launched in the region, 640 more start-ups than in the previous month.
This makes October the month with the highest number of new businesses in Yorkshire since May (4,953), with only September (3,950) seeing the number dropping below 4,000. (Ref. 62)
What is happening in Yorkshire is happening across the country. The number of active businesses in the UK has risen from 2.768 million in 2016 to 2.94 million in 2021. This good news comes with a health warning however as I pointed out in my last quarterly report. A high proportion of new businesses fail in their first couple of years, particularly when the economy is in difficulties. So there could be record business failures. No doubt those opposed to Brexit will be quick to tell us why.
Venture capital investment into UK start-ups saw the biggest annual opening on record despite the start of global economic uncertainty, with $11.3bn raised in Q1 of 2022. (Ref. 57) This exceeded China and India and was second only to US.
Tech Nation also reported investment into UK tech - reaching £55bn between January 2020 and June 2022. (Ref. 58)
In September Big Society Capital announced that the amount of social impact investment in the UK has grown nearly ten-fold over ten years to £7.9 billion in 2021. This is wonderful news at a time when the economic downturn due to the war in Ukraine is putting so much financial pressure on poor households. (Ref. 59)
Whilst the Elizabeth Line nears completion, HS2, the largest infrastructure project in Europe and the most important economic and social regeneration project in decades continues to grow. In July the first HS2 deep tunnel breakthrough occurred. Tunnelling commenced in December under ancient woodland in Warwickshire. (Ref. 60) The workforce is now approaching 30,000, across 350 sites and includes nearly 7,000 in the West Midlands, 1,000 apprentices, and over 2,000 former unemployed.
It has been reported that during H1 2022 the industrial & logistics leasing market has experienced significantly increased demand by manufacturing occupiers as they seek to ‘reshore’ activity back to the UK. Based upon data reviewing units of 100,000 sq ft and above, H1 2022 take-up from manufacturing occupiers has increased 53% versus H1 2021, and is the strongest H1 since 2017 following the post EU referendum increase in reshoring which I covered in my review of the first year of Brexit, section C5 on page 1,440. (Ref. 61)
Lower UK Investment
One of the constantly repeated assertions in articles on the impact of Brexit is that UK investment is much lower since the referendum than it would have been in the absence of Brexit. Lower investment is correct but it is not due to Brexit. Firstly the assertions are based on comparing investment immediately post 2016 with the eight years immediately preceding 2016 since the 2008 recession during which time investment was well above average. When compared to the long term, i.e. since 1995, GFCF has returned to the long term trend since 1995.
Secondly, another factor exaggerating the recent apparent weakness of UK business investment is the collapse since 2016 of investment in North Sea oil and gas, which has declined from 8% to 1% of total business investment. This reflects a long-term decline in the industry and some government decisions and is not connected to Brexit. Excluding this North Sea investment impact, UK business investment in Q2 2022 was almost the same as in Q2 2016, instead of being 6% lower as the headline number suggests.
Banking
Stock Exchange
On the 18th July Europe’s biggest listing for more than a decade occurred with the GlaxoSmithKline’s consumer spin-off Haleon floated on the London Stock Exchange. (Ref. 63)
B Change Enactment
B1 Environment
After 10 years of procrastination, afraid no doubt of public opinion, in July the government has finally given planning consent to the £20bn Sizewell C nuclear power plant in Suffolk. The UK has 11 reactors at six sites, compared with 56 in France, many of which are now getting very old in both countries.
In the first week of July, the UK government awarded contracts for c.11GW clean energy projects that can power nearly 12 million homes. New offshore wind projects account for nearly 7GW, onshore wind c. 900MW of new capacity, solar over 2.2GW, tidal 41MW, and floating offshore wind 32MW capacity. (Ref. 64)
New data shows that the UK is now a leading nation in cleantech after a record-high year for global investment in clean technologies. Around £134 billion was injected into the sector in 2021. UK cleantech attracts 18% of Europe’s investment in clean technologies. Additionally, nearly one-quarter of the 8,500 companies in Europe who create renewable energy tech, de-carbonisation, agricultural tech, and related sectors come from the UK. (Ref. 65)
In my last quarterly report I stated Hornsea 2 started generating power last December. In July the BBC reported that the world's current largest offshore wind farm is now fully operational. (Ref. 66)
In August the BBC reported that Scotland’s largest wind power facility, Seagreen, located off the Angus coast in the North Sea, had started to generate power. When fully operational, it will have 114 turbines and generate 1.1 gigawatt (GW) of electricity - enough to power about one million homes. Seagreen is also the deepest wind farm to be fixed to the seabed in the world. (Ref. 67)
Also in August, renewableUK reported that the UK’s combined onshore and offshore wind capacity has topped 25 GW, rising from 15 GW in 2017, and second highest in the world to China. (Ref. 68)
The UK has the highest pipeline wind power capacity in the world. (Ref. 69)
Work commenced on 7th July on a new £400m offshore wind facility on Teesside, set to become the biggest of its kind in the world. When complete, the facility is expected to produce between 100 and 150 monopiles per year for installation in the North Sea.
Currently, there are around 29,600 public chargepoints for charging electric vehicles in the UK. Just over 5,400 of those chargepoints facilitate ‘rapid’ charge, which takes around 30 minutes. As a consequence of the Local Electric Vehicle Infrastructure and Rapid Charging Funds by 2030, the UK government expects the number of public chargepoints to grow to around 300,000 public chargepoints as a minimum.
Rolls-Royce and easyJet announced in July that they are embarking on H2ZERO, a partnership to develop hydrogen combustion engine technology for a range of aircraft including those in the narrowbody market segment.
One year on from the COP26 in Glasgow, the UK demonstrated that it continues to take a world leading role in action on climate change at the Global Clean Energy Action Forum in Pittsburgh in September by the UK representative committing at least £1.5billion support to the US led global Clean Energy Technologies Challenge. (Ref. 70)
B2 Financial Policy
Events since the resignation of Johnson on 7th July have demonstrated that this country's fortunes is more to do with government policies than the decision of the people to leave the European Union six years and 2 weeks before that date. Nevertheless those opposed to Brexit still continue to blame Brexit for the ills of the country. I could post at further length but don't think I could express myself any better than the article by Larry Elliot in The Guardian on 6th November:
www.theguardian.com/politics/2022/nov/06/brexit-blame-uk-economy-opportunity-euAPPENDICES
Appendix 1
Previous Brexit reports:
Life After Brexit (20.11.2021) page 1,429
Review Of First Year Of Brexit (15.2.2022) page 1,440
Review Of First Year Of Brexit - Addendum (27.3.2022) page 1,452
Brexit 2nd Year Progress To Date (22.5.2022) page 1,464
Appendix 2
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 is due to inherent inaccuracy that many countries do not issue monthly statistics for many parameters, or they issue them a long time after the period, notably Japan. Where monthly statistics are reported on sites such as tradingeconomics they also report the previous month's result as it is very often a correction on what was issued the previous month. These corrections are invariably something the media fail to pick up on as they are "old news".
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