The past few months have seen the wailing and gnashing of teeth by those who voted Remain, reach some sort of crescendo. James Chapman, former Daily Mail political editor, director of communications for George Osborne and then Chief of Staff for David Davis and now at Bell Pottinger, has ejected a flurry of tweets slamming anyone who has ever said anything positive about Brexit. He has ranted on the Today programme and seems to have gone completely over the top and demanded that a new centrist party is set up to fight or reverse Brexit. So extreme are his tweets that friends are worried for his health. Meanwhile, the BBC has, allegedly, (I do not have a television and so cannot speak from first hand experience) been preaching an unrelenting diatribe of bad news for Brexiteers. The Guardian has been in a constant state of depression and the Financial Times has issued a steady stream of learned articles about how bad it is all going to be. All of these sources of news and commentary have reported news as either “Despite Brexit” if it is good economic news; or “Because of Brexit” if it is bad news. The more irreverent of us have now turned these two memes into hashtags and gleefully retweeted them on Twitter.
And yet my Twitter timeline is punctuated by people such as Robert Kimbell (@RedHotSquirrel) who tweets equally unrelenting good news about British companies which have just won new orders, or export orders, or are expanding. He tweets about those countries outside the EU who are queuing up to sign trading agreements with us. So, on the one hand it is all gloom and doom from the Remainers; and on the other it is as if we are about to burst into the sunny uplands of a resurgent Britain, free at last of the chains that bound us to the suffocating influence of the EU.
What then, is the truth? Can we even tell what the truth is? Does anyone know how all this is going to pan out? One particular article in The Guardian irritated me. In this piece, Barry Eichengreen, a professor of economics at University of California, Berkeley and former policy advisor at the IMF, is particularly unpleasant about the prospects of a newly independent United Kingdom. However, somewhat surprisingly for a professor of economics, he offers perilously little in the way of actual evidence to substantiate his case, other than that he thinks it’s all going to go tits up. He suggests that the devaluation of Sterling will bring inflation (it will), but chooses to ignore the fact that it will also bring export orders, may help to depress imports and will definitely boost tourism (it has). In common with other gloomadon-poppers, he asserts that there will be no landing agreements for British aircraft – and leaves us with the unspoken implication that we will all fall out of the sky when we go on holiday.
I started my search for truth and reconciliation by looking at trade figures, partly because this is where Robert Kimbell is coming from; and partly because it seems to me that trade is a good proxy for the health (or otherwise) of the economy. The UK has always been a trading nation and has always traded with continental Europe to a greater or lesser degree. When I say say “always” I mean it, because archeological evidence suggests that we have traded with France and Low Countries ever since the melting ice cut us off from the mainland. The Romans only ever bothered with us because they were already trading with us extensively. Trade expanded considerably during the Roman occupation and continued during the so-called Dark Ages. By the Medieval period, English wool was exported all over Europe – and many cities such as Bruges grew rich on the trade and need for banking that trade in English wool brought them. The vineyards of Burgundy, Bordeaux and Portugal grew rich on the demand from the burgeoning English (and Welsh) merchant classes. And so on, up to the present time.
The first place to explore UK trade figures is the most recent ONS tables here. This graph is reproduced in Figure 1 below:
Figure 1 – UK trade, exports and imports, from June 2007 to June 2017 (Source: ONS).
As has been the case ever since I can remember, our exports are exceeded by our imports, giving us a trade deficit which varies each month, but from initial inspection looks remarkably consistent over the timescale of the graph. By adding the two together to give us the total volume of trade, i.e. imports plus exports, we get figure 2 below:
Figure 2 – Volume of Imports plus Exports, June 2007 to June 2017
The situation is now slightly smoothed and we can now divide this up into five different phases and look at each individual phase of UK economic history since June 2007. If the data is split into these five phases we get the following figures:
Figure 3 – Phase I: UK Trade Volume, June 2007 to a peak in August 2008.
The banking crisis of 2008 started in 2007 with realisation that the subprime mortgage market was insolvent. Markets became increasingly jittery throughout 2007 and 2008, until on 15th September 2008, the huge investment bank Lehman Brothers, collapsed. What followed was a global recession, more banking collapses and various other smaller crises, such as the Greek recession – which continued to produce aftershocks for some time. Some argue that we haven’t finished yet. In the period leading up to August 2008, UK trade was roaring ahead, as can be seen from Figure 3. It should be noted that trade was rising steadily and at a consistent pace of roughly £2.3 Billion per month (Exports + Imports).
Figure 4 – Phase II: UK Trade Volume, September 2008 to July 2009; The Recession.
The immediate and terrifying plunge took nearly a year before it bottomed out in the UK. Each month saw a steady reduction in the amount of trade as businesses and individuals retreated into defensive positions. As these figures are for international trade, as opposed to trade within the UK, it can be suggested that international trade will be the first to suffer in an international recession. It is also likely that international trade will be the slowest to pick up when conditions ease.
Figure 5 – Phase III: UK Trade Volume August 2009 to July 2011 – The Recovery Period
Once again, trade increases steadily from one month to the next at about the same rate as it did before the 2008 crash. In August 2010, the volume of trade was once again at roughly the same value that it was before the crash, exactly one year later. There seemed to be a brief drawing of breath and then trade roared ahead again for another 12 months, until a strange flattening out occurred:
Figure 6 – Phase IV: UK Trade Volume August 2011 to February 2016 – The Bumpy Plateau
During this four and a half years, trade was characterised by a volatile set of peaks and troughs. Mostly, it was troughs for about two-thirds of the time. Overall, trade increased by only 3% over this period, or 0.7% annually. This is compared to increases of double figures in Phase I and Phase III. The causes for this economic behaviour are difficult to determine, but lack of business confidence will be a large factor. Certainly, this period deserves closer study, if only for the wild fluctuations in trade.
Figure 7 – Phase V: UK Trade Volume March 2016 to June 2017 – The Brexit Effect
This period is characterised by a growth of approximately 12% per year. Once again, the growth has returned to a more normal, steady increase from one month to the next over a long period of time. The volatility characterised by Phase IV has gone. The only concern is that there is an apparent flattening out of the curve in the final three months of the curve, but this may just be part of natural variation; or it may presage a downturn of some sort. However, it is not possible to tell which it is.
Much of the UK’s exports are founded upon manufactured goods (although these are now of reduced importance because of the modern predominance of the service sector). These days, the UK manufactures finished items such as cars, using imported components. We also manufacture components which are exported and then re-imported as part of a finished item such as a car. This phenomenon may help to explain the apparent very close relationship between exports and imports. So it is worth looking at manufacturing to see if that has a similar pattern:
Figure 8 – UK Manufacturing Value, 2007 to 2016 (Source: ONS)
This bears a superficial resemblance to the overall pattern of trade in Figure 2 above. There is the Phase I initial climb to the peak of 2008; the Phase II crash from 2008 to 2009; a Phase III period of quite rapid recovery for two years from 2009 to 2011; a Phase IV period from 2011 to 2015 of a slow and bumpy increase; and finally a phase V period from 2015 to 2016, a period of increase of roughly the same rate achieved in the pre-crash of 2007. In very approximate terms, this would suggest a relationship between trade and manufacturing which is fairly close.
However, the usual measure of the health of the economy, and the one most usually quoted in the headline news, is that of GDP. This yields a slightly different pattern:
Figure 9 – UK GDP from 2007 (2nd Quarter) to 2017 (2nd Quarter) (Source: ONS)
Once again, we see a rise to the peak of 2008, then a crash to 2009. What happens then is a long period of slow but consistent growth from the trough of 2009. There is no period of rapid recovery and no really obvious bumpy middle period. Perhaps, by exercising the imagination, it may be possible to discern a concave part of the growth curve (from 2011 to 2014) but this is stretching a point somewhat. What is remarkable, and very obvious, is that that GDP took a very long time to recover the lost ground after the crash, whereas trade and manufacturing recovered very quickly. Specifically, from the trough of 2009, GDP took four years to regain all the lost ground. Whereas trade took 11 months and manufacturing took one and a half years.
At least part of the puzzle lies in the reasons why there is this difference in the response of the GDP versus the Trade curve. The answer lies in this graphic from the ONS:
Figure 10 – Changes over time of composition of UK GDP. (Source: ONS)
And here we see that services now comprise nearly 80% of the generation of GDP in modern Britain. Furthermore, when looking at the way in which services have influenced GDP over time:
Figure 11 – Influence of different sectors upon GDP since crash of 2008 (Source: ONS)
The pale blue line represents services and this shows a very close similarity to the shape of the GDP curve. Production is the dark blue line and along with construction are both very much more volatile than services. Production includes manufacturing and so there are echoes of the manufacturing curve in Figure 8 above.
One further small question remains to be answered. Figure 1 above shows the trade deficit between exports and imports. Over time, this appears to be very consistent within slight variations from one month to the next. However, if the deficit is roughly consistent in absolute terms, whilst the value of exports (or imports) is rising steadily, then the relative trade deficit must be getting smaller. The following tests this possibility:
Figure 12 – Trade Deficit Relative to Exports (Derived from ONS data)
Here the trade deficit has very slowly declined from about 10% of the value of exports, to about 5.5%. The wide variation in the monthly figures is probably explained by the fact that most of this economic data is derived from surveys of businesses and that these surveys will suffer from intrinsic variation from one month to the next as different businesses are surveyed. Nevertheless, the trend is definitely downwards and heading towards a potential cross-over when exports exceed imports. In theory, on the current trajectory, it will take another decade or so before this happens.
Discussion and Conclusions
The foregoing examination of trade and GDP figures for the UK over the last decade suggests that when a financial crisis occurs and markets decline or slow down, trade is remarkably sensitive to those fluctuations in demand. Manufacturing is at least as sensitive to a decline or recession as trade, because orders are either cancelled or not made as individuals and businesses retreat into defensive positions in order to ride out the storm. Manufacturing then takes a little longer to recover when the upturn occurs. However, GDP, dominated in the UK by services, is slower to fall, does not fall as far, and takes much longer to recover. This explains the UK’s long and agonising crawl out of the 2008 banking crisis. The UK is dependent upon the services sector more than any other G7 country, as this ONS graphic shows:
Figure 13 – Percentage of service sector in each of G7 nations (Source: ONS)
However, the differences are marginal. The differences between Germany (which is widely considered to be dominated by manufacturing and export) and the UK is only about 11%. So it is clear that all highly developed economies such as ours, are dependent upon services for the bulk of their wealth creation. Nevertheless, the UK is often considered to be too dependent upon services; and there is a strong sense that our economy is in some way unbalanced. This impression is confirmed when we look at yet another excellent graphic from the ONS:
Figure 14 – Service sector contribution to regional economies (Source: ONS)
All this confirms what many of us have sensed for some time – that whilst London and its financial and other services is vitally important for the UK economy, there is a large part of the UK whose potential is seriously under-exploited. These regions were once centres of manufacturing, but have declined in importance. But there is no doubt that manufacturing (and therefore trade) are once again resurgent. The transition from the old heavy industries of steelmaking and mining have left a hole which is slowly being filled by forms of lighter and smarter manufacturing, which in many cases is returning to the UK. The vast populations of the Far East are becoming more prosperous and the wage differentials between the UK and Far East countries is narrowing. The time it takes for a container ship to travel from Shanghai to Southampton is about 31 days at 16 knots. Getting stuff into and out of a container and transporting to and from a port means that this time is extended by another week or two. This transport time adds to the logistics of distant manufacturing; and so there is a further encouragement for UK firms to re-shore their manufacturing and shorten the supply chain.
But none of this answers directly the original questions posed at the beginning of this article about whether or not the UK was about to plunge into a dreadful economic abyss caused by our exit from the European Union; or by contrast, whether we would be uplifted by our new freedom to negotiate our own trade deals with non-EU countries and remove barriers created by the customs union.
In the run up to the referendum, we were told (with perfectly straight faces by those who told us) that the economy would suffer an immediate disaster as a result of voting to leave the EU. Manifestly, this has not happened. Our GDP has continued to rise at roughly the same rate as it has done for the last eight years. Our trade continues to flourish, rising by about 10% between the referendum in June 2016 and June 2017. Manufacturing has risen by 1.9% for the same period, and this is comparable to the increase over the year 2007 to 2008, before the crash. It is also comparable to the rise in GDP for the same period.
The principle premise of the Remainers is that trade will stop completely between the UK and the EU if we do not concede to the demands of the single market. This is palpable nonsense. Nearly all EU countries need access to the lucrative UK market far more than the UK needs access to theirs. In particular, Germany needs the UK for a very large part of its vast manufacturing industries. And what Germany needs from the EU, Germany gets, regardless of the objections of other member states. Meanwhile, the UK is steadily doing more and more business with the rest of the world and the proportion of trade that we do with the EU is steadily diminishing. Admittedly, it is difficult to assess exactly what the split is because a large percentage of UK exports to the rest of the world are routed through Rotterdam and Antwerp and these are counted as exports to the EU – the so-called Rotterdam Effect. So all UK export statistics to the EU are overstated – the linked article suggests about 4% or so. Whilst much publicity is given to various EU politicians who have expressed a desire to punish the UK, this is unlikely to happen for very good commercial reasons. The EU needs the UK far more than we need them.
The 2008 banking crash was global in its extent, and the effect upon UK international and domestic trade was far-reaching and very deep. As a result the UK lost about 6.5% from its GDP and took four years to recover before GDP was restored to the pre-crash peak. There is no doubt that the UK relationship with the EU vis à vis trade is important, even if it is diminishing, but it is very much more restricted to the limits of UK and European economies. Importantly, most of UK GDP is generated within the UK rather than by trading with other countries. This suggests that UK is better insulated against punitive action by the EU than would be the case if we had a much more export oriented economy, such as Germany. All EU countries need to trade with each other and artificial constraints put upon that trade by the EU are unlikely to have the same reach as a global banking crisis similar to 2008. But it is instructive to look at what happened in the immediate aftermath of the 2008 crash:
Figure 15 – Proportion of UK Exports to EU and non-EU countries (Source: ONS)
Note that prior to the crash, UK exports to non-EU countries were exceeded by exports to the EU. By 2009, UK exporters’ response to the crash was to diversify into markets outside the EU. By 2011 the gap between EU and non-EU exports increased and now, EU exports are actually diminishing in real terms. Back in 2008, it was almost as if the kicking given to us by the crash was the necessary stimulus to get the UK out in to the rest of the world again. This trend is continuing.
This exploration of the rest of the world by UK exporters suggests that the inherent flexibility of attitude was what caused trade to recover back to its pre-crash peak within twelve months. It suggests that even if the EU bureaucrats enforced punitive action against the UK and effectively reduced a large proportion of UK exports to the EU, the response would be for those exporters to go elsewhere and recovery would be swift – i.e. within twelve months. UK GDP is unlikely to be seriously affected.
So, if there is cause to be confident that defensive measures against aggression by the EU are robust, does that still allow for the irrepressible optimism by Robert Kimbell – i.e. that we are standing on the threshold of a new, confident dawn? My own view is that it does. It is clear that there are huge areas of untapped economic productivity lurking within the UK. I feel that the financial services sector is at full capacity, or nearly so. The real potential for economic growth lies in the relatively downbeat areas of the North, the Midlands and the devolved countries of Wales, Scotland and Northern Ireland. Here lies potential for a return to manufacture as the basis for regional economies. One of the things that George Osborne got right was his insistence that there should be a “Northern Powerhouse”. Even here in Cornwall, there is a sense of engineering and mining returning once again to this quiet backwater of the United Kingdom.
This is not to say that are no serious problems lurking in hidden corners of the EU – and which are waiting to jump out and grab us by the throat. There are two principle difficulties ahead: The first is the size and location of a vast debt mountain lying un-talked about in Irish, German and Italian banks. The Greek problem rumbles on, with every bail-out only serving to repay the interest on loans given to them by German banks. Once these financial problems burst into the light of day, it will probably be enough to bring down the Euro.
The second problem is political. The invitation by Angela Merkel to millions of young men of Middle Eastern and North African origin to enrich themselves by coming to Europe, was unilateral and done without any consultation with the people of Europe. The invasion, by a culture which is alien and predominantly antagonistic to European culture, will eventually cause political unrest within Europe on a scale unseen for decades. The Visegrad countries of the Czech Republic, Poland, Slovakia and Hungary have already refused to accept these so-called “refugees” and have erected border fences on a scale which has not been seen since the Iron Curtain was demolished. The refusal by Poland to accept the situation imposed upon them by Brussels is leading them to a showdown in the European Court of Justice, and the potential for fines etc. Given that Poland is the biggest recipient of EU largesse, this is a potentially risky strategy by Poland. But Poland has had its national identity crushed by successive waves of Germans and Russians in recent history, and my suspicion is that they are unlikely to want to lose that identity again – this time to Brussels. Within this dispute, along with the departure of the UK from the EU, lies the seeds of break-up of the European Union.
These two issues represent indirect risks to the UK economy within the next decade. But they are not “because of Brexit” and neither are they insuperable. There is every reason for confidence for our future as an independent, sovereign nation once again. We have only to grasp the opportunities which will present themselves to us; and ensure that our politicians do as they are told.
“Once more unto the breach, dear friends, once more;
Or close the wall up with our English dead.
In peace there’s nothing so becomes a man
As modest stillness and humility:
But when the blast of war blows in our ears,
Then imitate the action of the tiger;
Stiffen the sinews, summon up the blood,
Disguise fair nature with hard-favour’d rage;
Then lend the eye a terrible aspect;
Let pry through the portage of the head
Like the brass cannon; let the brow o’erwhelm it
As fearfully as doth a galled rock
O’erhang and jutty his confounded base,
Swill’d with the wild and wasteful ocean.
Now set the teeth and stretch the nostril wide,
Hold hard the breath and bend up every spirit
To his full height. On, on, you noblest English.
Whose blood is fet from fathers of war-proof!
Fathers that, like so many Alexanders,
Have in these parts from morn till even fought
And sheathed their swords for lack of argument:
Dishonour not your mothers; now attest
That those whom you call’d fathers did beget you.
Be copy now to men of grosser blood,
And teach them how to war. And you, good yeoman,
Whose limbs were made in England, show us here
The mettle of your pasture; let us swear
That you are worth your breeding; which I doubt not;
For there is none of you so mean and base,
That hath not noble lustre in your eyes.
I see you stand like greyhounds in the slips,
Straining upon the start. The game’s afoot:
Follow your spirit, and upon this charge
Cry ‘God for Harry, England, and Saint George!'”