Another day has brought another set of UK economic indicators for EU “leavers” and “remainers” to bicker about.
The UK’s trade deficit fell back to £2bn in October compared to £5.8bn in September as exports increased by £2bn and imports decreased by £1.8bn.
So a great success for Brexit Britain? Not so fast.
Between the 3 months to July 2016 and the 3 months to October 2016, the total trade deficit for goods and services widened by £4.7bn to £13.2bn.
Exports increased by £1.6bn (2%) in that three-month period, but imports leapt £7.7bn (7.3%).
The falling value of the pound looms large here – as we’re paying more to import goods and a corresponding jump in export value has been slowed to materialise.
The ongoing rows over the interpretation of this data illustrates the difficulty of drawing solid conclusions from this early data – not least because we still haven’t left the EU.
But the impact on the pound has clearly been material already – around 18% down against the dollar currently despite a recent blip back upwards – and can be used to drive some back of an envelope calculations on what Brexit might have cost UK PLC so far.
A quick calculation based on the £13.2bn trade gap in the three months to October, suggests Brexit cost the import/export economy £2.4bn in that period (a currency driven 18% of that £13.2bn).
But the pound hasn’t uniformly fallen 18% against every import currency – for example it is down a more reasonable 10% against the euro – and a proportion of inputs will still have been paid for in sterling (meaning the seller rather than the buyer is absorbing the currency hit).
The trade deficit is clearly rising despite the October blip, but only a proportion of that escalation in trade deficit is Brexit driven – the deficit has been rising at a rapid rate since December 2015 when most still expected the UK to vote to stay in the EU.
Is an increase trade deficit necessarily a “cost” to the country after all, higher exports mean higher GDP growth even if import costs are also rising?
What proportion of the rising trade deficit to blame on Brexit is obviously highly contentious and necessarily involves a huge slice of guesswork.
But the impact on international trade of the falling pound is real – which is why there is growing pressure on UK prices, exemplified by Marmite-gate and so-called “shrinkflation”, as manufacturers seek to protect margin.
If we accept a multi-billion currency-driven “cost” of Brexit as fair – to what extent will that be mitigated by the (in)famous £350m a week saving on the cost of the EU? To what extent does the collapse in the pound dwarf this supposed saving?
Also, let’s not forget currencies can go up as well as down and the picture could yet look very different again when the UK has finally agreed on the terms of its (presumably forthcoming) EU exit.
The truth of all this is probably somewhere in the middle.
Brexit has changed the dynamic of the UK economy but it’s too early to conclude whether it has changed its direction. A weak pound is not the answer for UK manufacturing, nor is it its death knell.
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