Can you remember during the referendum campaign being told that UK exports to the EU were in decline while exports to the rest of the world were rising? It was an implicit claim that we didn’t need membership of the single market, that we wouldn’t miss it if we left. David Davis made this argument on a number of occasions as did many other leading Brexiteers. On his website Davis said, “It’s a bad deal – a huge trade deficit with the EU and a net £10 billion subscription on top. That is why we are losing our advantage over countries from outside the EU in markets within the EU; that is why the share of our exports going to the EU has dropped from over 60% to about 42%. And this share is predicted to fall even further in the future.”
Since we left exports to the EU have predictably fallen compared to what was expected but (and this is perhaps counterintuitive), UK exports to the rest of the world have fallen even further. And in the last month for which figures are available, July 2022, and despite erecting trade barriers, our exports to the EU now make up more than half the total!
Amazing isn’t it?
The FT report it under the strange headline: UK trade deficit widens while exports to EU hit record high. That's right, exports to the EU have reached a record high! It sounds good doesn't it, but read on...
"In July, the UK exported about £900mn worth of gas to the EU, about three times higher than in the same month last year, despite some reduction in UK gas trade owing to pipelines operating at overcapacity.
"As a result, the UK exported £50.3bn worth of goods to the EU in the three months to July, more than £2bn more than exports to non-EU countries. This is in contrast with 2019, when goods exports to non-EU countries was larger than to the bloc."
So, the reason is a bit of a one off. Because the continent lacks terminals to receive and gasify liquified natural gas coming in large bulk carriers, they are using a complex of terminals at Bacton just off the coast of Great Yarmouth, part of the UK national gas grid. Huge carriers discharge their cargoes which are then pumped to Europe through a common high pressure undersea pipeline used to either send or receive gas from the EU.
These cargoes count firstly as UK imports and shortly afterwards as exports and it's this which is giving a bit of a boost to our EU exports. It isn’t the whole story though, there is no doubt UK exports to the rest of the world are not rising in the way Davis and others thought they would.
While recognising this the FT also say the ONS figures "showed that trade in goods and services’ deficit, excluding precious metals, widened by £1.2bn to £27bn in the three months to July compared with the previous quarter, a near-record since comparable data was first collected in 1997."
In other words imports have grown more than exports.
William Bain, head of trade policy at the British Chambers of Commerce, described the UK's overseas trade position as “concerning” and called for the government to "refresh its export strategy to prioritise export-led growth as a greater proportion of UK economic growth”.
What "refresh" means he didn't say.
And in a masterly understatement an economist at Pantheon Macroeconomics, Gabriella Dickens, told the FT, that she expected the trade deficit to grow to a record 7.5 per cent of GDP in the final quarter, from 4.7 per cent in Q2, “making sterling even more sensitive than usual to changes in overseas investors’ sentiment”.
In other words watch out for a Sterling crisis this winter. We are truly back to the 1970s. The problem is as it was before. While we increased our exports, we increased imports even more!
Brexiteers seemed to think Britain's export performance to the RoW would suddenly surge ahead and it has in a way, but not as much as our imports. One of the surprising things about all this, is that HMRC data for 2021 shows that the number of UK businesses exporting goods to the EU fell by 33 per cent to 18,357 in the year, from 27,321 in 2020, according to City AM.
In the three months to July UK exports were at a record high despite losing a third of our EU exporters. I assume these were mainly smaller businesses so the actual loss of trade value and volumes wasn't as great, but imagine what the exports would have been without Brexit.
I suspect things will come to a head next year and become increasingly difficult. Companies in the UK will soon be facing increased competition from new overseas markets and rising inflation as energy costs soar and the pound slips further making other imported parts more expensive. Overseas investors will be put off by the difficulty in recruiting skilled labour because of the new Brexit related bureaucracy involved.
As I type this, a quick look at how sterling is trading this morning shows it has slipped to $1.1375 and against the euro the BBC's graph looks like this:
When I was selling European equipment the euro was often around €1.40 to the pound or even higher, now we are at €1.14. What does that say about how the UK's economy is being seen?
Buckle up, things are going downhill fast.
