Brexit 3rd Year Quarter 1 (4.6.2023)
This is the eighth 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 Q1 2023 (Ref.1)
G7: Canada 0.6%, Italy 0.6%, Japan 0.4%, US 0.3%, France 0.2%, UK 0.1%, Germany -0.3%
Other countries: Spain 0.5%, EU 0.2%, Euro area 0.1%, Netherlands -0.7%
The ONS first quarterly estimate states that during Q1 the UK services sector grew by just 0.1% on the previous quarter adversely impacted by strikes; the construction sector grew by 0.7%, the production sector grew by 0.1%, and there was a 0.5% growth in manufacturing. (Ref. 2)
In April the ONS announced that the monthly GDP was estimated to be 0.3% above its pre-coronavirus levels in February 2020. (Ref. 3) GDP fell by 0.3% in March 2023 compared to February but was still 0.1% above pre-pandemic levels in February 2020. (Ref. 4)
There is a presumption that GDP will increase every year. but a glance at the history of the UK annual GDP growth rate (Ref. 5) shows that there are years when the UK GDP does not increase. There are at least five years prior to the 2008 financial crisis
during EEC/EU membership when UK annual GDP declined. UK annual GDP growth has declined from typically c. 4% prior to joining the EEC in the 1970s to typically 2% in the decade prior to leaving the EU. The number of months when UK GDP declined during UK's membership of the EEC/EU are innumerable but if one month is negative these days, it elicits unwarranted media headlines.
Individual month's results are highly erratic. Even quarterly results are changeable; Italy had the largest GDP growth of the G7 economies in Q1, revised up to 0.6%, after having had the second worst negative growth in the previous quarter! The Netherlands has experienced a swing in the opposite direction from 0.6% growth in Q4 2022 to -0.7% growth in Q1. It is wiser to look at annual figures, which cancel seasonal effects, or at a series of successive quarters, hence a recession is normally classified as two successive negative quarters, but even that is not necessarily true as shown by the US last year.
The UK is not alone in low growth, during the last four quarters (12 months) Germany's GDP has
declined by a combined 0.4% (Ref. 6) compared with the UK's 0.2% combined growth.
The UK's economy growing faster than Germany's is not a fluke. In the last 10 years the UK economy has grown 15.3% compared with Germany's 12.6%, and since the UK voted to leave the EU in Q2 2016 the UK has grown 5.9% compared with Germany's 5.4%. Comparisons of course all depend on when you start from and period covered. Those opposed to Brexit cherry pick Q4 2019, just before the UK was hugely impacted by the pandemic with an 11% drop in GDP, which was significantly more than other countries due to the UK economy's high dependence on services and poor management of pandemic issues by the then Johnson government. Merkel's government managed the pandemic much better and Germany's 5% GDP fall in 2020 was less than half of the UK's, nevertheless the UK's GDP has grown more than Germany's during the last decade. A German economic recession is not good news for anybody, and bad news for the UK since Germany is the UK's 2nd largest trading partner, accounting for 8.0% of total UK trade in 2022. Germany's economic problems underline the importance of the UK becoming less dependant on the EU economy in the future.
Job vacancies declined during the quarter for the 10th consecutive period by 55,000 to 1,083,000. Some attribute this fall to economic pressures, but the more likely cause is the record level of immigration to fill jobs that need filling. Germany has a far bigger problem of shortage of workers. Whilst the UK job vacancies is declining, Germany's job vacancies has been climbing steeply for two years and reached 1,968,516 in December, according to the EUROSTAT, nearly double the UK's vacancies. (Ref. 7)
There is a false perception that the UK has high net immigration but the reality is the UK has experienced broadly similar levels of migration compared to other high-income countries, on average over the past few decades. Net migration is currently unusually high due to several factors including the war in Ukraine and the humanitarian route for Hong Kong British National Overseas status holders. The Migration Observatory has stated that increased net migration is not primarily the result of the post-Brexit immigration system that replaced free movement, but due to increases in temporary work and study migration and most leave the UK within a few years. However they do caution that predictions are uncertain and official predictions usually under estimate. (Ref. 8)
The major adverse impacts on the the UK economy presently are high inflation, due to the war in Ukraine and government policy (see section A4 below), and slowdown of services GDP due to strikes. These are coupled with continued high levels of economic inactivity due to over 50s retiring early and higher levels of long term sickness, what the Bank of England calls a “labour force shock”. Between late 2019 and mid 2022, the number of working-age people who were outside the labour force, due to early retirement, sickness, or studying, rose by around 800,000 people. Nevertheless, since leaving the EU the UK economy has grown in every quarter except Q1 2021 and Q3 2022. The former was due to government restrictions imposed due to the coronavirus (Ref. 9) and the latter was due to bank holiday business closures following the death of Queen Elizabeth.
UK business is generally doing well in post Brexit Britain; corporate profits increased by 16%, quarter on quarter, to a staggering £154,087 million in the fourth quarter of 2022. (Ref. 10)
Gross National Income continues to rise at the same rate as prior to the pandemic, if not faster. (Ref. 11 )
A recent report for the British Property Federation shows the sector performed strongly in 2022. Through its extensive supply chain, the commercial real estate sector directly and indirectly supported more than 2.6 million jobs in 2022, a 10% increase since 2019. and delivered £137.5 billion in economic output, a 28% increase on the year and 18% higher than pre-pandemic. Despite challenging economic conditions throughout 2022, businesses continued to invest heavily in capital with total capital investment reaching £72.6 billion and supporting 454,000 jobs.
The "build to rent " sector has grown by 28% in the past five years. Data for Q1 2023 shows that in the past 12 months, the sector grew by 9% between Q1 2022 and Q1 2023, with the regional BtR market growing at double the pace of London (12% and 6% respectively).
UK was ranked fourth globally in the new Shopify Entrepreneurship Index for 2022. The index is naturally dominated by the US. Eastern European countries are rated quite highly but only three G7 countries are rated in the top ten of 40 countries: US 1st, UK 4th, and Japan 10th. (Ref. 12)
The Shopify Entrepreneurship Index highlights that British businesses on Shopify have directly supported over 78,000 jobs and supported just under 200,000 jobs in total in 2022 and grew their exports by 8% in the last year, selling £3.2 billion of goods, second only to the USA.
A2 Employment
According to the ONS, estimates show Q1 increases in the employment rate by 0.2% and the unemployment rate by 0.1% compared with Q4 2022, while the economic inactivity rate decreased by 0.4%. Payroll employment dropped for the first time in over 2 years. (Ref. 13) Interestingly the increase in employment rate was partly driven by increased numbers of self employed, which is the sector that suffered the highest long term impact from the pandemic, due to lack of government support for the self employed.
These figures strongly suggest that those that have been economically inactive are now looking to return to the workforce, i.e. both taking jobs and registering to seek jobs. This is supported by recent months statistics showing that total hours worked is returning to pre-pandemic levels; over 50s are gradually returning to work, and 16 to 24 year olds reduced economic inactivity being the main reason. Record levels of sickness absence continue however. (Ref. 14)
Another important factor in the Q1 statistics is that for all the talk of UK economic slowdown, the redundancy rate declined by 20% from 3.5 per thousand employees during the previous quarter, to 2.8 per thousand employees.
Earnings Growth
Earnings Growth March 2023 (Ref. 15)
G7: US 7.04%, UK 5.8%, Germany* 2.8%, Italy 2.2%, France** n/a %, Canada 1.4%, Japan 0.8%
Other countries: Netherlands 5.2%, Euro zone n/a, EU n/a, Spain n/a
*Ref. 16 ** France's figure was not available at the time of posting.
UK workers continue to enjoy larger wage increase than many other nations. Growth in average total pay (including bonuses) was 5.8% and growth in regular pay (excluding bonuses) was 6.7% among employees in Q1 2023. Average regular pay growth for the private sector was 7.0% and for the public sector was 5.6%, the highest increase for over 19 years. (Ref. 17)
A 7% increase in pay in the private sector is virtually the same as the US average wage growth and suggests some "trickle down" of record business profits.
In April low paid UK workers received the largest ever increase in the UK National Living Wage of 9.7%, from £9.50 to £10.42 per hour. (Ref. 18)
UK low paid wage earners wages have risen so much that Daniel Ashville Louisy, director of construction firm Ashville Aggregates, has said
"We have labourers earning the money that plumbers and carpenters were earning like, two and a half, three years ago".
In addition to wage increases, at the end of Q1 the state pension was increased by the largest ever amount of up to 10.1% in line with the CPI. (Ref. 19)
Real Wage Growth March 2023, i.e. Earnings Growth - Inflation rate March 2023
G7: US 2.04%, Japan -2.4%, Canada -2.9%, UK -4.3%, France ?%, Germany -5.4*%, Italy -5.4%
Other countries: Netherlands 0.8%
*Ref. 16
A3. Unemployment March 2023 (Ref. 20)
G7: Japan 2.8%, US 3.5 %, UK 3.9%, Canada 5%, Germany 5.6%, France 7.1%, Italy 7.8%
Other countries: Netherlands 3.5%, EU 6%, Euro area 6.5%, Spain 13.26%
The UK continues to enjoy the lowest unemployment seen since the 1970s and a period of the highest number of job vacancies never seen before in our history. We can only guess at how many would be unemployed today if the UK had remained in the EU, and how many of those were British people unable to take a job being taken by an EU nationals due to the rules of Article 45 of the Treaty on the Functioning of the EU that permits EU workers to move freely within the EU.
A4 Inflation March 2023 (Ref. 21)
G7: Japan 3.2%, Canada 4.3%, US 5%, France 5.7%, Germany 7.4%, Italy 7.6%,
UK 10.1%.
Other countries: Spain 3.3%, Netherlands 4.4%, Euro area 6.9%, EU 8.3%, Sweden 10.6%
UK inflation in March was the highest in the G7. I have high-lighted this in
red as it is very significant; I have posted annual and quarterly performance comparisons for the G7 and other nations 21 times since the first 2021 review, and this is
the first and only time that the UK economic performance has been worse than the rest of the G7 in any of the 6 economic parameters I have reported on. It is not good news, but it proves that the constant claims that Brexit is an economic disaster are wrong. For most comparators during the last two and a quarter years since Brexit the UK performance has been at least as good as the mean G7 performance and in many cases better than the mean.
The question is: why is UK inflation so high?
The answer is UK government policy not Brexit. Whilst the UK government has taken some action to curb inflation, it has largely left the task to the Bank of England to raise base interest rates to reduce the money supply. Other major economies have taken greater direct action to limit price increases. Even the US has introduced anti inflation law rather than purely relying on fiscal regulation by its inflation reduction act which invested $370 billion into reducing energy costs for Americans. France was first to act by freezing regulated residential gas prices at October 2021 levels (Ref. 22) as energy prices jumped worldwide on the post-pandemic economic recovery.
The controls were extended in 2022 even though France was arguably least affected by the enormous increase in gas prices following the outbreak of the war in Ukraine due to its high level of nuclear power generation. Because of the UK's very high dependence on gas it is arguable the UK government should have done more than other countries' governments to ameliorate gas prices to households and businesses. 85% of UK households have gas boilers, over twice as many as EU households do. Gas accounts for 40% of UK electricity compared with 20% of EU electricity which is still significantly generated from coal in some countries like Germany, Poland, Czechia and even The Netherlands. The UK government was slower than other countries to cap energy prices, so has been playing catch-up and will see energy prices drop later than other countries.
The OECD report spells out how UK consumers have been far more impacted by energy costs than other countries (Ref. 23)
In terms of inflation excluding energy and food, the UK inflation performance is not significantly worse than other countries. In the case of food, those countries that are largely self sufficient and major food exporters naturally have experienced lower food inflation than countries like the UK and Germany that are major food importers.
I have posted previously on the greater action by other countries governments to curb energy and fuel cost increases, so will not repeat, but refer the reader to reference 24
Food inflation rates March 2023 (Ref. 25):
G7: Japan 7.8%, US 8.5%, Canada 8.9%, Italy 13.2%, France 15.9%, UK 19.1%, Germany 21.2%
Other countries: Euro area 17.5%, Netherlands 17.8%, EU 19.17%, Sweden 19.65%
Food inflation continued to increase in almost all countries into the new year, probably due to seasonal effects and bad weather in Spain/North Africa. Even France, the largest food producer in Europe and a major food exporter, with a lower general inflation rate than the other European G7 countries, has seen food inflation peak at 15.9%. UK food inflation rate in March was the same as the EU average and less than Germany and Sweden. Reports blaming food inflation on Brexit are therefore wildly exaggerated.
According to the IMF
"Inflation measures how much more expensive a set of goods and services has become over a certain period, usually a year " consequently what happened to the value of the £ over a year prior to an annual set of inflation data has little relevance. The fact that the value of the £ declined in value immediately post the Brexit referendum in 2016 has very little bearing on today's annual inflation rate. What should be remembered is that from joining the EEC in the 1970s the value of the £ against the $ declined by c. 40% up to the referendum in 2016, driven by the huge negative UK trade balance with the EU. Consequently membership of the EEC/EU did little to support the value of the £, in fact during the UK's membership of the EEC/EU there have been a number of sterling crises.
It should be noted that the bare statistics do not give the full picture. As with general inflation other countries have been more proactive than the UK on food price inflation. Spain cut VAT on food products to zero in January for 6 months which dropped year on year food prices significantly. (Ref. 26) France's government has negotiated a loose agreement with leading supermarkets that will see them slash the cost of staple items and keep them there for a limited period. It is only recently that the UK government has started to consult the UK food industry.
A5 Trade
Trade figures continue to be distorted by energy prices which are now falling sharply depressing imports and export values. The quarterly trade in goods deficit narrowed by £8.9 billion to £55.0 billion in Quarter 1, while the trade in services surplus widened by £1.3 billion to £39.8 billion. Thus the total trade in goods and services deficit narrowed by £10.2 billion to £15.1 billion in Quarter 1. (Ref. 27)
The services sector represents 80% of the UK economy and since the 2016 referendum the UK’s exports of services has increased by 25% despite the intervening pandemic. The proportion of services exported to none EU countries has increased from approximately a half to approximately two thirds. Despite some loss of business to the EU, the UK remains the world's top exporter of financial services. In January it was announced that the UK-based financial and related professional services industry’s trade surplus increased to £81bn in 2021. (Ref. 28)
There are repeated references in anti Brexit media that UK exports have not performed as well as peer countries. These reports are often accompanied with a graph showing export trends of various nations which start with a base point of Quarter 4 2019. The reason that start point is chosen is because it was a peak point for UK exports that year, a record year for UK exports, as the final quarter of the calendar year often is. This methodology creates a false impression that the UK has not performed as well as other countries. If Quarter 1, often the weakest quarter for UK exports, was chosen as the base point a completely different picture would be presented, but that is just playing with statistics. Better to look at a graph of actual figures as shown in reference 29, which show exports have been at an all time record high value, although this is largely driven by inflation.
Final statistics for UK trade with the US during 2022 confirm record exports with the UK's number 1 customer reaching >£168 bn, a 19% increase on 2019 and 2021 the previous record year. (Ref. 30) The UK has agreed MoUs with Indiana, North Carolina, South Carolina, and Oklahoma, which are helping UK businesses meet new buyers and secure new contracts. Discussions are ongoing with other states including Utah, Texas and California, the largest sub-national economy in the world and larger than the UK.
Trade with Germany, the UK's second biggest customer was also at record levels in 2022 with exports rising back to the pre-pandemic level. (Ref. 31)
Exports to France were boosted to a record >£43 bn in 2022 by power exports in the summer when French nuclear power stations were under maintenance. Regrettably the trade deficit with France increased due to much higher imported food costs. As pointed out above, food inflation in France is now nearly three times France's general rate of inflation. (Ref. 32)
Exports to the UK's third largest customer the Netherlands increased massively by 25% to an all time record >£55 bn in 2022 largely driven by the price of energy. (Ref. 33)
The value of UK exports to the Commonwealth increased by 22% between 2021 and 2022 to £78 bn.
2022 saw UK imports at an all time high leading to a record trade deficit. This was due to the enormous increase in the cost of energy and food imports. As the price of energy eases, the cost of imports is now declining and the trade deficit improving from its nadir in early 2022. The war in Ukraine has shown how vulnerable the UK is, being heavily dependant on energy imports, and how we need to reduce that dependency; even if that means exploiting more of our natural reserves of oil, till renewable energy is fully achieved which will take decades.
The UK government continues to exercise the freedom to negotiate trade deals having left the EU:
Late 2022 the UK and Ukraine agreed a digital trade agreement. (Ref. 34) The agreement is based on a similar agreement signed between the UK and Singapore earlier in 2022 and follows the government’s decision to cut tariffs on all goods from Ukraine to zero in May 2022. Under the deal, which was signed off in March, Ukrainian businesses will have guaranteed access to the financial services crucial for reconstruction efforts through the deal’s facilitation of cross-border data flows. Ukrainian businesses will also be able to trade more efficiently and cheaply with the UK through electronic transactions, e-signatures and e-contracts. (Ref. 35)
The initiatives to remove trade barriers with African countries continued in March with the UK-Kenya Economic Partnership Council meeting in London for the first time. The Economic Partnership Agreement is the first trade agreement Kenya has signed with a partner outside of Africa and will help secure jobs, increase economic growth, and support agricultural development and manufacturing in Kenya. (Ref. 36)
The 2030 Roadmap for UK-Israel Bilateral Relations, which was signed on March 21, pledges £20 million in joint funding commitments for technology and innovation projects, (Ref. 37)
A survey by Deloitte (Ref. 38) has found that whilst the majority of businesses trading in the EU have seen a reduction in trade with the continent following Brexit; two thirds (66%) of those businesses who also traded around the world made gains outside of the EU, and that companies trading overseas are broadly supportive of UK trade negotiations and optimistic about economic growth. Over one third of those businesses recouped their EU losses entirely. Most UK exports are outside of the EU and stand to gain significantly in the future as the UK secures more trade deals, and from CPTPP membership, the benefits from which are described in Appendix 2. There seems to be a perception by some that new trade deals with non EU countries is a substitute to trading with the EU. The UK will continue to trade strongly with EU countries, as shown above with record exports to Germany, France and the Netherlands, however the UK is now free from EU restrictions to establish improved trade relationships with the rest of the world.
The ninth round of trade negotiations with India took place during the last week in April as planned and a new British Trade Office was inaugurated in Pune on 28th. Earlier in the month, India had dismissed as "baseless" reports in British media stating that it had halted talks for a free trade agreement with the UK over the attack on the Indian high commission in London in March. (Ref. 39) It is unfortunate that much of the British media tell lies with the intent of undermining government or misleading the public, but which can also potentially damage the country. India is the second largest investor country into the UK. 107 Indian sourced FDI projects were initiated in the UK during financial year 2021-22, creating 8,664 new jobs in the UK. There are now 954 Indian-owned companies in the UK, which is an increase of almost a third from 2014 and up from 900 in 2022. The economic contribution made by these companies, with a combined turnover for 2023 was £50.5 billion (up from £19 billion in 2014) and over 100,000 people being employed by them.
In economic terms, India is going through remarkable development and its economy is expected to grow by a massive 6% each year and be the world's third largest economy by 2030; there is a huge opportunity for UK financial services to act as a capital funnel into India from the rest of the world.
India is only the UK's 12th largest trading partner, but trade is growing very rapidly. In 2022 total trade grew by 45% to £35.9 bn. and exports grew by 61.5%.
Logistics
With the continued growth of UK trade and reducing dependence on Irish trade, Rotterdam and Antwerp, investment in the UK's ports continues at pace to provide an enhanced and environmentally sustainable future.
London Gateway reported a 14% rise in volumes to 2,053,000 TEU – the first time it has ever exceeded two million units in a year, consolidating its position as Britain’s second biggest container terminal. Over the next 10 years, the logistics provider has earmarked a further £1 billion of investment, with a £350m new fourth berth at London Gateway now well under construction. (Ref. 40)
In February Associated British Ports, the UK’s leading ports group, announced its new sustainability strategy, with a plan to invest around £2 billion in decarbonising its own operations by 2040 and in major infrastructure projects. (Ref. 41)
A6 Finance
UK gross fixed capital formation increased for the fourth quarter in a row and reached a record £105.5 bn. GFCF increased by 1.3% in Quarter 1 2023 and was 0.4% above where it was in the same quarter a year ago, and 4.8% above its pre-coronavirus (Quarter 4 2019) levels. (Ref. 42)
UK business investment started to recover from the effects of the war in Ukraine and increased by 0.7% in the first quarter of 2023, exceeding market forecasts of a 0.4% fall. Business investment grew by 3.2% on annual basis but is severely impacted by energy costs, inflation including employment costs, increased interest rates, and some post pandemic shortages still remain.
FDI into Europe continues to be below pre-pandemic levels with investors put off by the energy crisis in Europe. France, the UK and Germany continue to attract 50% of total projects in Europe. France heads the list for the fourth year running with 1,259 projects, whilst the UK had 929 projects, and Germany 832 projects. The UK FDIs created 46,779 jobs compared with France’s 38,102. (Ref. 43)
The UK Space Agency and PwC announced recently that the UK is the second most attractive place for private sector space investment behind the US, and the top destination in Europe. (Ref. 44)
The UK government has announced a £100m investment in foundation models, a rapidly emerging type of artificial intelligence. (Ref. 45)
Dyson plans to invest £100 million in a new technology site in Bristol as it expands the number of robotics centres around the UK. The vacuum cleaner and battery manufacturer intends to employ hundreds of software and artificial intelligence engineers at the new site to develop products and apps. The centre will also house Dyson’s commercial and e-commerce teams for Britain and Ireland.
Excavation work during the HS2 project, the largest infrastructure project in Europe, has discovered the remains of the magnificent Coleshill Manor and possible evidence that it was the site of the first conflict in the Civil War where Parliamentarians attacked the Royalist stronghold. More than 1,000 archaeologists, specialists, scientists and conservators will be exploring and recording over 60 archaeological sites for HS2. As part of HS2’s enabling works, they will reveal over 10,000 years of British history.
A7 Summary of UK Economic Performance in Quarter 1 2023.
The UK GDP continues to grow despite major issues with inflation, post pandemic economic inactivity, and strikes. (Ref. 2)
UK continues to enjoy higher wage increase than the period prior to the Brexit referendum and prior to leaving the EU. (Ref. 46)
The UK continues to enjoy low unemployment levels not seen since the 1970s, prior to joining the EEC. (Ref. 47)
UK gross fixed capital formation investments continues to grow at an all time record level. (Ref. 42)
Unfortunately UK inflation is at the highest level for decades triggered by the war in Ukraine and exacerbated by UK government mismanagement particularly during the Johnson and Truss premierships.
Change Enactment
Legislation/Sovereignty
I welcome the government decision to remove the deadline for scrapping EU legislation. Reading between the lines in the government statement (Ref. 48) which states
"it has become clear that the programme was becoming more about reducing legal risk by preserving EU laws than prioritising meaningful reform" , it seems clear that the government has seen sense and decided to adopt a more considered approach to changing EU law. Much EU law is good law and should be retained, with the focus on changing that EU legislation that works to the UK's disadvantage or can be improved by future governments.
Foreign Affairs
During April the Foreign Secretary visited Japan, the Pacific Islands and New Zealand promoting a free and open Indo-Pacific – as the region becomes the centre of growing geopolitical competition.
The UK continues to be a world leader in the support of Ukraine and is the first country to commit to supplying long range missiles.
Relations with the EU
The Sunak administration appears to have brought some softening of UK-EU relations with the Windsor Framework and closer cooperation over response to Russia's invasion of Ukraine. Plus, there is an ever increasing number of bilateral agreements with EU countries such as: France - illegal immigration control and defence, Poland - air defence, Netherlands - energy link, and Italy - fighter plane development, etc. The EU will come to recognise there are benefits to be gained from mutually beneficial agreements with the UK, the world's 6th largest economy. In the case of pass-porting (particularly children) and residency, for example, it is the EU that has most to gain from agreeing mutual terms in terms of tourism. Spain would like to remove the obstacle to allowing UK citizens to stay in Spain for more than the permitted 90 day period. (Ref. 49)
British buyers remain the biggest overseas spenders when it comes to buying property in Spain - despite a 17% fall in enquiries from British buyers last year.
Ultimately it should become possible to agree inter-mutual terms on work permit, student study and travel, entertainers' work rules, financial services regulation, etc. and many other topics. Just as the UK and Ireland have a special relationship, so can the UK and the EU. Many of the arrangements that were in place when the UK was a member of the EU can be replicated by new agreements, it just needs constructive cooperation to make it happen.
Defence
On March 13, 2023, Australia, the UK, and the US formally announced an arrangement for Australia to acquire a conventionally-armed, nuclear-powered submarine capability through the Australia-United Kingdom-United States (AUKUS) enhanced security partnership. (Ref. 50)
Also in March the UK and France began a 3 year agreement to develop future long range weapons for the British and French navies and air forces. The future Cruise/Anti-Ship Weapon programme will look at options to replace and improve existing weapons systems in the next decade. Alongside sharing costs, each country will contribute €50 million to this phase,.both sides will benefit from access to each other’s national technology expertise, trials and test facilities. (Ref. 51)
The UK and France have "
agreed to strengthen our defence and security partnership, committing to look at areas of cooperation to increase the interoperability of our joint defence capabilities – and to advance key projects to develop complex weapons systems." (Ref. 52)
£650m funding for the development of a new jet fighter to be developed in conjunction with Italy and Japan has been announced by the government. (Ref. 53)
In April, the UK and Poland signed a major £1.9 billion export agreement to roll out a British air defence system across Poland, the EU's fifth largest nation. (Ref. 54)
Agriculture
The vertical farming industry is undergoing massive growth, not just in the UK but also worldwide. According to Forbes, the indoor vertical farming market was worth around $3 billion globally back in 2018. By 2026, it’s predicted to reach a massive $22 billion. It is suggested investment could grow to around $50 billion. This development is essential to the UK that imports so much of its food, including a high proportion from the the EU which I expect will decline in years to come due to climate change and future legislation on agriculture sustainability in the EU. Shortages in supply from Europe such as those experienced recently in tomatoes and cucumbers will increase in the future. The logistics of getting produce to the UK always means the UK is at the back of the queue. This is always likely to be the case as British shoppers tend to shop at the the cheapest supermarkets who squeeze their suppliers the most; que sera. UK taxpayers are now investing in vertical farming in London. (Ref. 55) North Yorkshire farmers Heck are starting the first vertical farm in my area to produce their own herbs instead of importing. (Ref. 56)
The UK has taken the wisest long term route of getting out of the CAP, concentrating on sustainable food production in the UK, and spreading our dependency on food to the rest of the world including the antipodes.
Environment
In March a £1.8 bn energy saving scheme was announced called the Social Housing Decarbonisation Fund, Home Upgrade Grant and Public Sector Decarbonisation Scheme, the aim of which is to upgrade social homes and public buildings. £1.4 billion is to go to local authorities, providers of social housing and charities to upgrade homes and off-grid households with energy efficiency measures with funding expected to support 20,000 jobs. £409 million also awarded to reduce carbon emissions of hospitals, schools, museums, universities and other public sector buildings across England. (Ref. 57)
Also in March the government announced £3bn of Net Zero projects have been approved for the world’s first gas-fired power plant with carbon capture and storage facilities located in Teesside, producing up to 860 megawatts of electricity, enough to power around 1.3 million homes per year. Up to two million tonnes of CO2 emissions from the power station will be captured per year and transported offshore for storage. The investment will create up to 5,500 jobs during its construction and will add up to £300m pa to the economy. (Ref. 58)
In the same month the government launched its Green Finance Strategy which was welcomed by UK Export Finance, the British Business Bank, UK Research and Innovation , and the UK Infrastructure Bank. (Ref. 59)
On the 12th April at the IMF Spring Meeting in Washington, the Chancellor pledged $3.3 bn to the IMF's Resilience and Sustainability trust that supports projects in developing countries to combat climate change, future pandemics and energy insecurity. He also committed to deliver £535m to the IMF's Poverty Reduction and Growth trust, as well as provide an additional $500m in UK-guaranteed loans to Ukraine.
The UK is a world leader in environmental performance and addressing climate change. The UK currently has the world’s largest operational offshore wind farm project, Hornsea 2, and the second, third and fourth largest operational offshore wind farm projects in the world. The UK has one of the greatest CO2 storage potentials of any country in the world, the UK Continental Shelf, There are over 200 companies working on hydrogen and fuel cell technologies in the UK, and we consistently feature in the top ten countries globally for hydrogen technology patent rates. In 2022, the UK had the second highest battery electric car sales in Europe. Not surprisingly, whilst Germany increases its dependence on fossil fuels till renewables come on line by shutting their last nuclear power stations, and France continues its massive dependence on ageing nuclear plants, seeking to extend lives beyond 50 years, the 4th and 7th largest world economies are squabbling over EU policy. (Ref. 60)
The UK is taking the sensible middle route of moderate dependence on nuclear which is essential when the wind doesn't blow and the sun isn't shining. Britain leads Europe with 45 offshore wind farms producing 14GW, with plans to expand capacity to 50GW by 2030. Germany has 30 producing 8GW, followed by the Netherlands with 2.8GW and Denmark and Belgium, both with 2.3GW. France aims to expand massively to 40GW by 2050.
France are also committed to building many more nuclear reactors and the debate in the EU continues. (Ref. 61)
The UK and Japan, the world's third largest economy have agreed to collaborate on energy security and accelerate the clean energy transition to achieve net-zero by 2050. (Ref. 62)
Dutch and British governments have announced plans for an innovative electricity link to connect offshore wind between the Netherlands and the UK. Called "Lion Link", the interconnection aims to support decarbonisation, market integration and strengthen security of supply and will be an important next step towards an integrated offshore grid in the North Sea. (Ref. 63)
In March Essar group announced that the UK government has chosen Essar Energy Transitions’ Vertex Hydrogen project in Stanlow as part of one of the two hydrogen plants. (Ref. 64)
As well as major government led investments there are scores of examples of small initiatives taking place. First Hydrogen has partnered with fleet management provider Rivus to start operational trials with a “first-of-its-kind” hydrogen fuel cell-powered vehicle.
In March the UK and Singapore extended the Free Trade Agreement and Digital Economy Agreement to agree a UK-Singapore Green Economy Framework combining elements of climate, economic and trade policy. The agreement is the first of its kind and aims to facilitate both countries achieving national decarbonisation targets in alignment with the Paris Agreement while enhancing energy security and promoting green growth through new investment, job creation and export opportunities. Collaboration will include green transport, low carbon energy technologies, and sustainable finance and carbon markets. Singapore is a major world logistics hub. (Ref. 65)
The UK and Canada have agreed to co-operate on critical minerals such as cobalt and lithium that are essential to the economy and used in almost all modern and green technologies, from solar panels to electric vehicles. Canada represents a large opportunity for UK mining and engineering firms, with the country currently producing 60 minerals and metals at 200 mines and 6,500 quarries. The UK has the second largest mining and quarrying industry in Europe. (Ref. 66)
During the coronation celebrations the government announced a commitment to give about $100 million to the Brazilian government’s fund to protect the Amazon rainforest. Sunak and Brazilian President Luiz Inacio Lula da Silva also discussed the bilateral trade relationship and
“agreed on the importance of working together to address trade barriers and unlock investment between the two countries”. The UK and Brazil have agreed a new Partnership for Green and Inclusive Growth. (Ref. 67)
APPENDICES
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
Brexit 2nd Year 2nd Quarter Progress To Date (25.8.2022) page 1,490
Brexit 2nd Year 3rd Quarter Progress To Date (26.11.2022) page 1,508
Brexit 2nd Year (3.4.2023) page 1,530
Appendix 2
Benefits of joining CPTPP :
Possibly the most significant economic event for the UK since leaving the EU occurred on the last day of the quarter when the Government announced it had substantially concluded negotiations on the UK’s accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. (Ref. 68)
The benefits of joining the CPTPP, which are based solely on "static modelling", have been derided by some people, but they have clearly failed to read, or chosen to ignore, the small print of the agreement, Naturally economic benefit predictions are cautious and no account is taken of future growth of the CPTPP in terms of organic growth of its present members, which is expected to be much faster than the EU growth rate. CPTPP nations are among some of the fastest growing in the world, and a key cornerstone of the Indo-Pacific market that is expected to generate over half of the world's growth up to 2050. According to PwC’s ‘The World in 2050’ report, Vietnam will experience the biggest growth in terms of GDP out of any other country in the world. The report also predicts that six of the top ten economies in 2050 will be today’s emerging markets, and six will be in the Indo-Pacific region. CPTPP is also expected to increase growth with extra membership such as Thailand and South Korea. Having worked with nationals from both those countries at Teesside (SSI and POSCO) I am well aware of the potential economic growth of both those nations.
The assessment takes no account of improved resilience of demand; a wider range of markets for sales helps protect British business from cyclical fluctuations in its existing markets. Presently the UK is still too dependent on the EU market and likely to suffer a backlash to any downturn in the EU economy, such as the recent crop shortages due to bad weather, which would have impacted the UK just as much had it remained an EU member.
Joining a specific trade arrangement offers the UK some security against rising protectionism in the world generally, and widens its economic dependency.
Commentators have questioned why the UK should leave one trade organization, only to join another. The CPTPP is not a political union so does not come with all of the constraints and obligations associated with EU membership. The Partnership will not be making laws for the UK dictating our migration policies, employment law, and a host of other economic and fiscal regulations. However the significant importance of the UK joining the CPTPP is political. It strengthens the bonds between the UK, Australia, and Japan, not just in economic terms as they already exist, but in defence and democracy in the Far East. The UK are also a welcome partner to the rest of the group as the UK has entered on existing treaty terms and has not had to compromise in a significant way such as accepting hormone produced beef. This is important to the existing members as it sets a precedent for future new members who might have expected a change in terms to accommodate them. That is now far less likely with the UK another G7 country in the grouping. The UK is not a founding member but it has effectively become one by agreeing terms that are unlikely to be changed now for any other new members with the possible exception of the US returning to membership.
The CPTPP is a very different sort of organization to the EU. It has no desire to be an ever-closer union with a huge bureaucracy and assembly buildings in Brussels and Strasbourg, or taxing and redistributing wealth in the interests of all power gravitating to the centre. Unlike the EU, the CPTPP does not restrict its members' access to goods from outside the CPTPP by applying tariffs, quotas, boundless red-tape, etc. Joining the CPTPP allows UK manufacturers to cumulate CPTPP materials and semi-finished goods for trade purposes, which individual bilateral trade deals don’t. This facilitates that if a good has enough CPTPP content it can be exported tariff free to other CPTPP members. Conversely the terms agreed between member states such as the UK- Australia trade deal are not overridden by the CPTPP rules. This is unlike EU membership which precludes member states making separate trade agreements. Consequently the UK will press on with renegotiating improved trade terms with Canada and Mexico and other major world economies.
The UK Food & Drink Federation have listed 5 benefits from their point of view from CPTPP membership: New opportunities to export to Malaysia and Brunei, exports to the other 9 members are more competitive, improved access to essential imports making the UK more resilient, more flexibility for manufacturers to access tariff free trade, and it speeds up trade in short shelf life food and drink products. The FDF's head of international trade Dominic Goudie has stated :
“We welcome news that the UK has concluded an agreement to join the CPTPP, which will deliver exciting opportunities to enhance our trade with the world’s most dynamic economies."
Of course what applies to the food and drink industry applies to a host of other UK export businesses, particularly those less dependant on logistics such as services. The Institute Of Directors has stated
"Accession to CPTPP is a real opportunity to secure and strengthen relationships with markets set for huge expansion over the next few decades."
The importance of this area of the world was evidenced at the recent G7 meeting in Japan where as well as the usual attendees, including EU representatives there were representatives from Australia, India, Brazil, South Korea, Vietnam, Indonesia, Comoros (representing the African Union) and the Cook Islands (representing the Pacific Islands Forum). As with the EU, the economic might of the G7 is waning; in 1990, the G7 group accounted for just over half of the world's GDP, according to the IMF, now it's just under 30%. When the UK joined the EEC in the 1970s, the present EU members plus the UK represented about a third of the world GDP, the EU share of world trade is now just 15%, which is one of the reasons I believe the UK was best out of the EU and free to remove trade barriers with the rest of the world even if it created barriers with the EU. The UK share of trade with the EU had already been in steady decline for many years, and bound to decline further as east European EU members increased their share of EU trade. The UK is now far better placed to take advantage of faster growing North American, Middle East, and Indo-Pacific economies as well as cultivating a longer term relationship with Africa and South America. The UK also has the additional benefit which those areas of the world don't have which is to be "next door" to the EU.
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