Richard North, 02/02/2019  
 


One strand of the Brexit story which emerged yesterday was the Purchasing Managers' Index for January, with some unsettling news.

UK manufacturers, it appears, had stockpiled at a record rate last month, the fastest rise in inventories recorded in the 27 years since formal monitoring began, indisputably a direct response to fears of component delivery hold-ups due to port disruption in the event of a no-deal Brexit in March.

If nothing else, that tells us that manufacturers are taking the threat of a no-deal seriously. But, with other data that have emerged, a lot more can be deduced. Specifically, the index of overall manufacturing activity came in at 52.9, down from 54.2 in December and below City analysts' expectations. A further contraction is expected for the first quarter of 2019.

The crucial issue, though, is that, despite the temporary boost provided by stockpiling activities, the underlying trends in output and new orders is, according to the compilers of the index, "lacklustre at best". Growth of new order inflows has slowed sharply and new export orders are near-stagnant. Already, there is a clear risk of manufacturing sliding into recession.

And if this is what is happening in the run-up to a no-deal Brexit, it takes very little imagination to continue the trend and work out what might happen in the aftermath of Brexit. Essentially, if it's bad now and getting worse, the onset of a no-deal can only make it even worse.

Crucially, the reason why export orders are stagnant is that overseas customers are reluctant to order goods, in case they face delays or tariffs on delivery in the event of a no-deal. They are thus looking to alternative suppliers, and reducing their reliance on UK sources.

Not only is this a process that is likely to continue, once we leave the EU without a deal, fears in many instances will be realised. EU-based businesses will find it very difficult to procure from the UK many different categories of goods. UK exports to EU Member States will therefore continue to contract, even to the point at which the word "collapse" is being used.

Picking up from my piece yesterday, therefore, this additional news provides additional support for my thesis that the primary impact of a no-deal Brexit will be on exports. Necessarily, if the volume of outgoing trade then contracts, we are less likely to see congestion at the ports. The most important adverse effects are going to be economic, which are not going to be immediately visible.

However, far from acknowledging the likelihood of delayed effects, the immediate impacts of a no-deal Brexit are now becoming a fashionable cause for the legacy media to pursue, ranging from food shortages to the downturn in new car sales. Scarcely a day goes by without us being regaled with one or more lurid stories about the fate that awaits us.

This, of course, does not preclude the possibility of some of these stories being true – at least partially so. One of the latest is a report from the Guardian which has officials warning of "putrefying piles of rubbish" after a no-deal Brexit.

The problem will arise when, supposedly, "export licences" for millions of tons of waste exported to EU Member States for processing and disposal will become "invalid overnight". This will leave the UK with significant quantities of unprocessed refuse which could give rise to any number of pollution events.

There is also concern that if farmers cannot export beef and lamb, a backlog of livestock on farms could cause liquid manure stores to overflow – something not likely to be a problem with sheep, but an issue that could give rise to some local problems for cattle rearers.

However, the intra-Union movement of waste is not currently governed by "export licenses" as such, but by a system of notifications and consents. Mostly, those that are in place when we leave the EU will lapse, as EU waste law will no longer apply to the UK as a third country.

That itself, though, does not necessarily prohibit the export of waste to EU Member States. But a different system will apply, which requires a more complex bureaucracy, the involvement of customs controls and certain financial guarantees. Obviously, it will take time to set up new systems. Until then, waste movements will be prohibited, raising significant and very real problems, especially in Northern Ireland.

Although this is now news to the Guardian, it is worth pointing out that the issue was raised in an EU Commission Notice to Stakeholders, published on 8 November 2018. It has taken the newspaper all this time to notice something that has been in the public domain for nearly a quarter of a year - then only noticing because it has been "leaked" from UK sources. Once again, we see the best way of keeping a secret is for the Commission to publish material openly on its own website.

There is also another short-term issue here, to which the Guardian does not refer. Because of the imbalance of trade in goods with the EU, waste exports from the UK have had the beneficial effect of filling containers from the EU that would otherwise have been returned empty - thereby attracting return revenue and reducing overall shipping costs.

With this "trade" now effectively prohibited, one might see a significant hike in transport costs, as containers are increasingly only able to attract revenue on one leg of a return journey.

And if this is a real effect of a no-deal, there are doubtless others which will exert noticeable short-term effects. According to The Times the civil service itself thinks that a no-deal Brexit "could quickly overwhelm Whitehall", forcing the government to go on emergency round-the-clock footing for months after Brexit day.

Immediate priorities, we are told, will be "welfare, health, transport and security of UK citizens at home and abroad, and the economic stability of the UK". And even as regards the Department for Transport, the scale of the operation is "potentially enormous".

A 37-page guide to the working of the transport operations centre states that, if there is no deal, "the impacts could be felt [and] could fall across every transport mode [and possibly each sector within wider government], and could grow exponentially as … the capabilities of responders at all levels decrease or become overwhelmed".

Particularly, the government is worried about consequences they cannot foresee, its guide stating: "Critically, it has to be understood that … there will be issues of unanticipated impacts that arise, or impacts which had not been fully understood".

That is a fair enough comment, especially as so much depends on the actions of EU Member States, in the context where many of them are either unprepared or uncertain of what is required of them – or both. In the absence of certainty, there is a limit to how much planning can be done. Much will have to be left to ad hoc responses on the day.

Yet, even if the immediate effects of a no-deal Brexit might be overstated, the most obvious thing for any export industries might be to plan time out in the period immediately after 29 March, until the situation becomes more certain. But for some, the period before Brexit is also hedged with uncertainty.

Ships bound for the Far East, for instance, take six weeks to arrive. Prior to Brexit, goods loaded will be processed with regards to EU agreements with the destination countries but, by the time they arrive, we might be out of the EU and the agreements may no longer apply. Shippers might be faced with unexpected restrictions, while importers might be confronted with demands for tariff or other tax payments.

This might be an additional reason why export orders are stagnant, in which case we might see the position deteriorate in the run-up to Brexit.

Most of all, therefore, businesses need certainty. We are entering a limbo period where any long-term planning is becoming near impossible, and the focus is entirely on short-term needs and survival strategies. That in itself will have a significant cost.

Even a delay in Brexit now will just prolong the agony, to the extent that, if it is to happen, we are best getting a no-deal over and done with. And if a deal is delayed to the last minute, it will be of little short-term help. Firms are already entering the window where they have to assume the worst. Much of the damage has already been done and all that can be done is to survey the wreckage.






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