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We need to talk about Brovid: when Covid and a no deal Brexit clash
The pace and path of the global economic recovery in the wake of Covid-19 remains extraordinarily uncertain, as countries rebound from mutually reinforcing and profound shocks to both demand (how much people buy and consume) and supply (how these goods and services are provided). Many countries have seen a decade or more of economic growth wiped out in the course of a few months.
For the UK it’s even more complicated than that. Here, covid-related uncertainty also interacts with a large number of other adjustments. There is the overriding objective of reducing the UK’s reliance on South-East England, and closing the economic and social gaps between groups and regions — “levelling-up”. There’s the target to become a carbon neutral country by 2050 — an enormous but correct undertaking. And there’s the end of free movement of people and workers between the UK and the EU, changing the composition of Britain’s labour market.
And then there are the changes to how the UK does business with the rest of the world, driven by a fusion of objectives: democratic control (Brexit), more self-sufficiency (medical equipment), better security (the Huawei ban), and overall less reliance on far-flung parts of the world, most notably China.
The obvious point: the UK’s economic recovery is highly complex and any simple answer — on the overall picture or its individual parts— is likely the wrong answer. This is particularly true of Brexit. On December 31 (the fifth Brexit deadline in four years) the UK’s stand-still transition ends, and Britain and the EU will enter into a fundamentally different relationship, deal or no deal.
Despite the UK-EU talks currently going nowhere — with both sides blaming each other — a deal is probably more likely than not. When up against a hard deadline, European negotiations tend to gravitate towards a deal.
What’s under discussion is also a pretty limited goods-only Free Trade Agreement, meaning the two sides actually don’t have to agree on that much. The EU and UK have overcome greater differences in the past, including in the withdrawal negotiations (in particular the Irish border).
But there’s also a distinct possibility that time will run out and the UK will exit on December 31 with no overall agreement, triggering questions around how such a scenario would affect the UK’s fragile recovery, and relate to all other adjustments it is going through.
I get this question in particular from businesses thinking about whether to keep people on, and invest as government support schemes come to an end in the autumn and winter, coinciding with the end of the transition period.
Unsurprisingly, there are two polarised schools of thought. The first claims that No Deal adjustments, for businesses and others, have merged with the Covid-19 adjustment anyway. So no big deal. The second is that it would be one economic disaster on top of another, doubling the damage. As so often, the answer is likely more nuanced. Let’s take demand, supply and the overall picture in turn.
First, demand. Given how much of the UK economy and its recovery are driven by domestic consumer spending, it would be very bad if a No Deal scenario further dampened consumer confidence going into the new year. However, consumer spending has held up better since the referendum than many had predicted. And I have always been sceptical that Britons, having voted for delivering Brexit will turn around and stop spending because of Brexit. As a driver of consumer behaviour, it’s dwarfed and largely absorbed by Covid. The caveat is if a No Deal triggers substantially more job losses, given the correlation with consumer confidence, but that is far from certain.
Secondly, supply side and chains. This is different. Covid and Brexit mostly involve different types of value chain disruption.
The former is primarily about hedging against factory shut-downs, outbreaks or a freeze in consumer spending. The latter is primarily about hedging against border delays, new duties or invalid licences. For one, you want to keep as little stock as possible, to manage acute cash flow problems and to keep agile; for the other you want to stock-build to manage unplanned border delays. While the response can clearly pull in the same direction — for example, securing more lorry drivers — and companies absolutely need to make sure Brexit and Covid adjustments work in tandem, the point is it’s not as simple to say that one effect is absorbed by the other.
In the medium term, Brexit may merge with a wider trend for more local production and shorter supply chains, but that will very much vary between sectors and companies, and depends on a range of other global developments.
Finally, the overall picture. Paradoxically, the zone of economic uncertainty has narrowed since Theresa May’s days, as unlike her preferred outcome, the difference between a goods-only Free Trade Agreement and No Deal isn’t that great for several sectors including for services and industries where tariffs are low or zero, such as pharmaceuticals and aerospace. So the difference in overall economic impact between the two scenarios should also be smaller.
A No Deal would, however, probably have a negative impact on the sentiment around the UK and slow its economic recovery via for example less business investment in the short-term according to some heavily caveated modelling I’ve seen.
But yet again, other factors, like the policy mix around stimulus, taxation and regulation may be bigger drivers of investment decisions than the precise Brexit outcome. And over the medium to long-term, Brexit isn’t even on the same planet as some of the UK’s structural adjustments, including Net Zero which will touch every part of society and economy. On the upside, if the UK can pull all of this off, it will come out a strong and highly-dynamic economy.
Mats Persson is a business strategy consultant and a former Downing Street adviser
