13th August UK Economic Update – Unemployment rising fast
Children return to school in early September, and many offices are urging their workers to return at the same time to try and reinvigorate the city centres in London, Manchester, Birmingham and Edinburgh.
The UK’s latest GDP figures, out today, show the British economy is two months into a recovery from the deepest recession on record. The 20.4% fall in output in 2020’s Q2 is the biggest decline on record. At its lowest point in April 2020 the UK was no larger than it was in 2002. Eighteen years of growth had vanished, all of it shed, remarkably, in just two months — March and April 2020.
As a fifth of the economy was put on hold during the early weeks of lockdown, it was no surprise that the economy crashed. Similarly, as the economy switches back on, much of the output will return, as is already happening. Growth over the month of May was 2.4% followed by a record 8.7% in June, as more restrictions were lifted.
By the end of Q2, the economy was only 17.2% smaller than at its February 2020 peak, so back to the size it was in 2010, post the financial crisis. In the first two months of the corona crisis, the UK gave up 18 years of growth, then recovered eight years’ worth in the next two months. Unprecedented is an overused adjective, but this is unprecedented.
The National Institute of Economic and Social Research is now forecasting growth of 15% in the three months to September as the economy rebounds fast.
But unemployment is rising fast, which may cause house prices to drop and the economy to stall as the winter approaches and the jobs furlough scheme comes to an end.
13th August UK Political Update – Brexit talks resume in September
In common with much of Europe, the British Parliament is now on holiday until September 1st. Meanwhile, Brexit talks adjourned on 30th July, for a two week holiday break, and will resume in mid-August. What is likely to happen then?
In June, Boris Johnson pledged to put a “tiger in the tank” of the talks to reach a preliminary agreement by the end of July. But there is much ground still to cover and some key issues are still far from resolved.
As the Times Brexit Briefing reported a few days ago, that is not to say that the talks are in crisis. Far from it. Mr Johnson’s timescale was always unrealistic because to get a deal will require difficult compromises on both sides and politics, and especially EU politics, somehow always requires these compromises to be made at the eleventh hour and preferably in the middle of the night.
And that is where we look to be headed. If there is a deal it is unlikely to come much before October at the earliest, giving both sides a decent opportunity to look over the cliff edge.
The biggest stumbling block is state aid.
Crucially, the UK government has so far failed to agree internally on the future of Britain’s competition policy. EU negotiators and governments have been left baffled at the absence of a decision, or policy paper, on how Britain will regulate “state aid” and subsidies to business, especially manufacturing after 2020.
David Frost, Johnson’s chief negotiator, promised that the decision would be taken in time for the July talks but the policy failed to materialise amid rumours of internal warfare in Downing Street and Whitehall.
European governments have been keenly watching for the debate to surface in parliament or in public but so far the political wrangling has taken place at the subterranean level.
While the issue of fishing is the most polarised and difficult element of the talks, the state aid question is fundamental to agreement on “level playing field” trade rules between Britain and EU after the transition period ends next year.
Tactically, the British government’s inability to decide such a key post-Brexit policy is self-defeating, as concerns over the future British subsidies to industry dwarf the EU’s fishing interests, which are restricted to eight countries.
“We are completely puzzled,” a senior European diplomatic source said. “If we don’t have a clue what the model is then it’s very difficult to construct a level playing field mechanism. Unlike on fishing the EU is totally united on state aid. Considering it is such an important post-Brexit policy the political silence in the UK is deafening.”
European governments have told their chief negotiator, Michel Barnier, not to budge on any negotiating issues, even if agreements are in sight, until the state aid question is clear.
“We need to know what the model is. Is it entirely political where a ministry, the Treasury or the business department, disburses subsidies on the basis of unpublished or vague criteria?,” the source said.
“Or, is there a clear legal framework in primary legislation enforced by an independent agency with the power to impose penalties or remedies? We can’t do the trade deal until we know.”
Notwithstanding the state aid bafflement, the EU is “game on” for a post-Brexit trade, fishing and security deal this September but the final package will be limited and low on innovation.
On fisheries, both sides are keeping the final numbers, in terms of catch quotas, closely guarded until the end game, probably at talks between Angela Merkel and President Macron in late August.
France will not budge on fisheries until the state aid issue is settled because it needs to show French fishermen that Britain will not get access to the single market at the expense of losses to fishing communities in Normandy or Brittany. Progress was made in the last fortnight on the “governance” issue with concessions from Britain but, as with state aid, there are still details to be cleared up.
One key element, a red line for France and EU, is “cross retaliation” allowing disputes over fishing to result in penalties, in the form of tariffs on goods made in Britain. “We are closer on governance but not there yet,” the source said.
Because of the failure to reach an “early understanding on the principles underlying any agreement” in July, the timetable is now very tight. There is gloom on both sides, expressed privately by both Barnier and Frost, over the quality of a future deal because of the lack of time. Talks must be concluded by October.
Barnier briefed EU ambassadors on July 24th that while a trade deal would be expected to deliver zero tariffs and quotas there will be a need to revisit talks next year to draw up separate sector agreements.
Similarly, Frost warned Johnson at the end of July that a free trade agreement with the EU will now be of much lower quality than the government had hoped a month ago.
“It is clear that this is not going to be a free trade agreement at the most expansive or most innovative end of the spectrum,” a senior source close to the negotiations said.
Why is the question of state aid so fraught?
Ministers are split over the plans for Britain’s post-Brexit state aid rules and it is the single biggest factor hampering progress in negotiations with the European Union.
The government has yet to publish its plans to replace the EU’s business subsidy regime that restricts how and when ministers can step in to support UK industry.
The issue has become the subject of a fierce debate in Whitehall with the Treasury arguing that the UK needs clear, independently assessed and enforceable rules while others, led by Dominic Cummings, favour a light touch regime.
Boris Johnson has yet to make a decision and until he does it is hard to see a way for the talks to progress.
The issue may be knotty but it is totemic. In the past the UK has been stricter than many other EU countries in refusing to subsidise businesses or industries (directly or indirectly) that are uncompetitive even when it could have been in the wider national interest to do so.
But the EU senses correctly that Mr Johnson is far from wedded to this approach.
Particularly in the light of the Covid crisis they sense an appetite in London for a far more interventionist approach that could see the government stepping in to support key sectors of the economy in a way that would have been inconceivable before.
And they worry that if the UK is not following pre-set and independently assessed rules the government could use state aid to help British firms undercut EU competitors.
The Financial Times reported in late July that key Brexiteers led by Mr Cummings are arguing against any legislation that would put the UK’s internal market subsidy regime between England, Scotland and Wales under an independent regulator.
“No 10 seems to care enough about this to potentially derail the negotiations with the EU,” one official told the paper.
“The idea is that you’d have a regime based on some ‘administrative principles’ but it would all be very vague and non-statutory, with a watchdog-type body that would only provide ‘persuasive force’ in the event of any egregious behaviour.” How this plays out is far from clear. This issue has yet to be fully discussed at the cabinet’s EU exit strategy meeting and time is running out.
On many issues in the negotiations both sides have taken positions that they intended to compromise for issues they cared about more. State aid, as dry as it sounds, is not one of them.
How is the UK progressing on trade deals?
Back in the early days of Brexit, Liam Fox, then trade secretary, made a confident prediction.
By the time Britain formally left the European Union, Mr Fox said, we would have replicated the 40 trade deals that Brussels has with countries around the world. They would be ready to go the “second after midnight” when we left.
So how close is the government to replicating those existing EU trade deals and how close is it to securing new ones?
The department of trade has successfully replicated 19 of these existing deals, covering 50 countries or territories and representing more than 6 per cent of total UK exports.
If the Japan trade deal is ratified, then this will add another £29 billion of trade that will be covered by a free trade agreement at the end of the transition period.
Talks also appear to be going well with other countries like New Zealand and Australia, with whom we do not have free trade agreements through the EU, and who are keen to strike bespoke deals with Britain.
These may not be ready to go by the end of the year — but there is a will on both sides to make them happen sooner rather than later.
However, the government has still not concluded negotiations with a further 18 countries which have EU trade deals, including big economies like Canada and Mexico. These arrangements represent more than £35 billion of existing exports — about 5 per cent of the total.
In particular Canada, to which the UK exported more than £11 billion in goods and services in 2018, looks tricky.
The Canadian government says it wants to know the terms of Britain’s future trading relationship with the EU before finalising any rollover of the existing Ceta trade deal.
Given that any trade deal between Britain and the EU is unlikely to emerge much before October this does not give much time to reach an agreement with Canada.
A potential US trade deal is the elephant in the room. Initial negotiations began in May with Liz Truss, the international trade secretary, saying she wanted to sign an “ambitious agreement” that significantly boosted trade and investment. Two months later and talks are on the rocks.
Both sides concede privately that there is no way a deal can be reached before November’s presidential election — if at all. At the heart of the problem is Washington’s determination that the deal should open up the UK’s market to American agricultural produce.
That is a political non-starter for the UK government. With a powerful coalition of farmers and environmental groups vehemently opposed and the public wary over scare stories like chlorinated chicken, it is a hurdle that cannot be overcome soon.
If President Trump, who has championed a UK trade deal, loses in November to Joe Biden then the prospects will deteriorate further. The UK could return — as President Obama so notoriously put it — to the “back of the queue”.
But there is a potential game changer on the horizon. The UK wants to join the oddly named Comprehensive and Progressive Agreement for Trans-Pacific Partnership.
This is a free-trade alliance that includes Australia, Japan and New Zealand, as well as Canada, Chile and Mexico, and together its 11 members account for 13 per cent of global economic output. In its own right membership would be a boost for the government’s “global Britain” aspirations but there is also the potential for American involvement.
Initially the agreement was due to include the US but President Trump withdrew from it. Senior government figures believe that if the Democrats win the White House in November the US is likely to seek re-entry to the deal.
This would provide an easy and far less controversial way of striking improved trade terms with the US than a bespoke bilateral deal, and would provide real economic benefits to Britain.
It is of course, at best, some years away but it does represent many of the ideals that free-trade Brexiteers hoped to achieve. And if the UK were also to successfully negotiate a broad-ranging EU free trade deal then the country may start to realise the aspiration behind the vote to leave.
How will the UK food supply cope with Brexit?
Supermarket shelves cleared of pasta, rice and flour were a regular sight at the start of the pandemic in the UK.
Ultimately, however, the food supply chain proved remarkably resilient to the sharp rise in demand, with none of the shortages lasting for long. George Eustice, the environment secretary, claimed this showed “we don’t need to worry too much” about the effect of Brexit on food.
But MPs and industry leaders are warning that the experience could have been a trial run for January 2021, when the transition period will end and disruption to cross-border trade could present a far bigger challenge.
They say that the reason food supply continued relatively smoothly is because trade with Europe continued uninterrupted, with Italy increasing its production of pasta during the height of the crisis and sending more of it to Britain.
In a report published in late July the Commons committee for environment, food and rural affairs urged the government to appoint a food security minister to focus on meeting that challenge, as well as the longer-term problem of climate change.
It cites Andrew Opie, director of food and sustainability for the British Retail Consortium, who warns that Brexit presents a bigger threat than coronavirus.
“The reason I say that is that we had no problem getting food to this country at any time because the borders were flowing,” he said. “If we see the borders disrupted in January from a disorderly Brexit, we have a big problem.”
The most immediate issue has to do with the winter supply of fresh food and vegetables, particularly at a time when the prime minister is launching a healthy eating campaign.
In January, 90 per cent of lettuce, 80 per cent of tomatoes, and 70 per cent of soft fruit in Britain is imported from Europe. The country also imports 35 per cent of yoghurt, 40 per cent of butter and 67 percent of cheese it consumes.
According to Arla, Britain’s biggest dairy supplier, there are two possibilities come the start of 2021: either a reduced supply and higher prices, or a trade deal with minimal tariffs and barriers.
Either way, it warned recently, ministers would be wrong to see the experience of coronavirus as proof that the Brexit food supply chain problem is solved.
13th August UK Social Update – Portugal still ‘in quarantine’
While much of the UK is on holiday until the end of August, Portugal remains on the UK government’s list requiring 14 days of quarantine on return from a trip to the country. As a result, many would-be British visitors find their travel insurance will not cover any trips so they are doing UK staycations, and flights to Portugal for August on the low cost carriers like Ryanair and Easyjet are half empty and extremely good value.
There are signs that Portugal may be removed from the UK quarantine list in the next couple of weeks, which may help the late summer and golf season. For anyone planning on travelling, the Portuguese tourist authorities have set up dedicated travel insurance for Portugal – see www.portugaltravelinsurance.com