Jonathan Marriott, Chief Investment Officer
In the absence of COVID-19, it is likely that the news headlines in the UK would have been dominated by the economic impact of Brexit instead. The pandemic has had much greater consequences and disentangling the Brexit effect is therefore impossible. This week, we have seen a rise in inflation with Consumer Price Index (CPI) up 4.2% over the past year, more than double the Bank of England’s target. This has been fuelled by higher energy prices and supply shortages. Inflation is high in other countries with CPI in the US at 6.2% over the last year. Higher input costs risk slowing economic growth globally, not just in the UK. While the timing of the pandemic impact and the roll out of the vaccine has varied globally, the effect on supply chains is being felt in much of the same way in many parts of the world. In light of this, it is hard to see that Brexit has made too much of a difference. To a certain extent, the fact that the UK had left the European Union (EU) gave the British Government greater flexibility to respond to the pandemic faster. In particular, the roll out of vaccines was quicker in the UK than the rest of Europe. On the other hand, we can also see how Brexit may have made things more difficult and the recovery from the pandemic somewhat harder.
Supply chain difficulties have been to blame for shortages and higher prices. In particular, there has been a lack of HGV drivers and staff in the hospitality sector after employees were furloughed or made redundant during the pandemic, and have since secured new jobs in less volatile industries. In addition, many foreign workers have returned to their home countries as a consequence of losing jobs. The Office of National Statistics (ONS) population data only goes up to 2020, but since 2017 the population of EU nationals residing in the UK has declined by 315,000, having risen steadily over the previous ten years by 2.2 million. During this time, the non-EU national population has remained broadly steady. The ONS do caveat that their data is unreliable during the pandemic, but the trend is clear, even if we have to wait for more current data. EU Nationals trying to return to the UK will now have to get work permits, however the Government has amended the policy to make this possible for lorry drivers in a bid to tackle the shortage. It is worth noting that this is a temporary move and adds paperwork that was not there before.
The additional paperwork has slowed customs clearance and complicated international trade, adding further pressure to the supply chain difficulties. However, it is impossible to extract the impact on trade from the pandemic damage. The Northern Ireland protocol was a fudge to ease the land border between the North and South of Ireland. This has led to difficulties with trade across the Irish Sea. Lord Frost has been trying to renegotiate this and is threatening to pull out of the arrangement. He continues to seek a compromise, but the EU threatens sanctions in return. If no compromise is agreed, this threatens EU and UK trade when the economy remains vulnerable. If the UK withdraws unilaterally, one could expect the pound to fall and trade sanctions, adding to upward inflationary pressures. This in turn would add pressure on the Bank of England to respond by raising interest rates.
It is in all parties’ interests to find a constructive way forward, as further disruption would not be good for the fragile post-pandemic UK economy. However, as we have said many times the UK economy is not the UK stock market, the FTSE 100 has many international companies with overseas earnings. A fall in the pound usually supports these companies and as we saw post the Brexit vote, the FTSE 100 could rally.
The pandemic and the measures implemented to control it have had a dramatic impact on the economy, which has dwarfed the impact of Brexit. As the vaccine roll out continues and the world recovers from the pandemic, the consequences of Brexit may well come into focus once more. In the long run, the UK may benefit from new trading arrangements with the rest of the world. However, in the short-term wrangling with the EU is likely to continue to make things difficult. Economists are likely to debate the Brexit impact for years to come, as much as they did before the vote.
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