RaboResearch - Economic Research

Brexit Monitor: May opts for delay with D-day only 9 months away

Economic Comment

  • Recent Brexit developments: further delay, but Brexit means Brexit
  • Economic developments: mixed signals
  • In the spotlight: Big impact in vulnerable sectors, like the fishing industry

Co-author: Beyhan de Jong

Recent developments: further delay, but Brexit means Brexit

Increased polarisation in British politics
Recent Brexit-debate in the UK has highlighted the deep and growing polarisation around the desired Brexit outcome in British politics. This polarisation can be observed at all political levels: in parliament (both amongst ruling Conservatives and the Labour opposition), the cabinet and even Prime Minister May’s own Brexit committee. The Prime Minister has so far managed to avoid a confrontation by fudging solutions to the various Brexit issues. This leaves the official standpoint of the UK government on several Brexit issues inconclusive and risks stalling negotiations with the EU.

Stuck at the Irish border
The UK did not propose a feasible and clear proposal to prevent a hard border between Northern Ireland and the Republic of Ireland post Brexit before the 28-29 June EU summit, as the EU had aimed. Further delays are expected now, pushing the deadline for the withdrawal agreement to December (see Brexit timeline at the end of this study).

Concerns over negotiation delay
The EU and the business sector have expressed their worries about the recent delays in negotiations. More and more companies are taking measures to prepare for a ‘hard Brexit’.

Unchanged expectations
Despite all the political noise in the UK and the delays in Brexit negotiations we maintain our base case of a last minute deal that leads to a transition period and a comprehensive Free Trade Agreement afterwards. The revealed support for a customs union in the British parliament increases the odds that such an agreement will include some kind of a customs arrangement. Nevertheless, a hard Brexit is still possible.

Economic developments: mixed signals

Soft second quarter indicators give mixed signals
The British economy slowed sharply in 18Q1. Soft 18Q2 data points towards some recovery in household consumption and services. The labor market remains tight, on the back of increasing employment. But, a softening patch on the housing market and lower private credit growth could hurt consumption going forward. Other sectors of the economy such as industry and export remain weak.

Pound stays weak
The pound fluctuated around 0.88 EUR/GBP in recent months. We expect the pound to remain weak while uncertainty about Brexit negotiations persists.

Brexit uncertainty takes its toll on investments
Business investments contracted in 18Q1 and we expect them to remain weak in 2018 as Brexit uncertainty persists. This is in line with recent signaling from the private sector. Airbus and BMW recently warned that a ‘hard Brexit’ would threaten their future in the UK. A letter from five big British business associations followed and indicated that companies are starting to implement their contingency plans. According to a recent poll in France, Germany, Sweden, Ireland, Spain and the Netherlands a lot of companies have already decreased their investments in the UK (46% of the respondents).

In the spotlight: Big impact for vulnerable sectors, like the fishing industry

Sectors differ in terms of vulnerability to Brexit. The fishing industry is an example of a vulnerable sector. Below we present an analysis of the possible consequences for the sector.

Changing access to fishing waters?

We expect that the EU and the UK will negotiate access to each other’s fishing waters as part of the new trade relationship. In a worst case scenario, allocation of all fishing quotas in the UK’s extensive economic zone (EEZ) to British fishing vessels could lead to the full exclusion of foreign vessels from British waters – including the Dutch fishing vessels. The Netherlands is one of the nations with the highest dependency rates on fishing in British waters. On average, the total value of the Dutch fishermen’s catch from the UK fishing grounds accounts for 30-40% of the total Dutch landings – by volume it amounts to up to 60%. Sole, plaice and herring are the main species landed by the Dutch fishing vessels in UK waters.

Limited access to the UK market

Access to each other’s markets will also be negotiated as part of the trade relationship. In case of a free trade agreement (FTA) scenario, some seafood products could still face import tariffs as they could be excluded from the FTA. Such tariffs would make imports more expensive. In addition to tariffs, with the introduction of borders, in a post-Brexit world, non-tariff barriers such as sanitary and phytosanitory measures and technical barriers to trade would also add friction to EU-UK seafood trade. In case of hard Brexit, the EU’s most favoured nation (MFN) tariff rates could apply to seafood products traded between the UK and the EU and range from 2% to 20%.

Seafood trade EU- UK

The UK is the 7th largest export market for Dutch seafood. In 2017, the Netherlands exported EUR 136 million value of seafood products to the UK – which makes 12% of the UK’s seafood imports from the EU. Frozen cod, haddock and flat fish fillets are the main exported seafood products from the Netherlands to the UK. In 2017, the Dutch seafood imports from the UK amounted to EUR 97 million. Most imported seafood products are fresh and chilled plaice and sole, and frozen mackerel.

Figure 1: Nine months left until Brexit day
Figure 1: Nine months left until Brexit dayNote: The UK and the EU are negotiating on three main issues with respect to Brexit: 1)The past: the Brexit withdrawal terms, 2)The future: the trade relationship between the UK and the EU post- Brexit and 3)The transition period: the time span in between. Together these make up the Brexit withdrawal agreement which the EU and the UK need to sign and ratify before March 29, 2019 to prevent a ‘hard’ Brexit.
Alexandra Dumitru
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO

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