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Brexit Monitor: The negotiations continue

Economic Report

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The decision by the British people to leave the EU may have serious consequences for Dutch businesses. Our Brexit Monitor keeps you up to date with the latest Brexit developments. What effects will Brexit have, and what can you expect? An overview of the main news and analysis from experts. In this issue:

  • Political developments: tensions are high
  • Economic developments: a warm summer helps the economy
  • Feature: fresh products are vulnerable
  • How to make the most of Brexit? Four tips from Mart Valstar, director of Best Fresh Group

Political developments: tensions are high

Still more time needed

The European summit on 18 and 19 October failed to provide much news about the Brexit negotiations. Intensive discussions in the two weeks prior to the summit did however lead to the United Kingdom (UK) and the European Union (EU) reaching agreement on 95% of the substance of the divorce settlement. And initially, it looked as though there was a solution for avoiding a hard border in Ireland, but this continues to be a sensitive issue. Under political pressure at home, British Prime Minister May had to cease discussions with the EU on 14 October.

Pressure is mounting

It looks as though the EU and the UK will not reach agreement on the divorce settlement until the EU summit on 13 and 14 December. Prime Minister May is apparently planning to then steer the deal through the UK parliament just one week before Christmas, giving opponents little time to organise themselves. But it also means that the prime minister herself will have little time to gather adequate support in parliament. So it is a risky strategy, especially given the divisions in British politics. For this reason, we now consider the likelihood of a ‘hard’ Brexit to be almost as great as the chance of a deal (see the barometer). Despite the large-scale protests in the UK against Brexit, we think the chance that Brexit will not happen (‘Bremain’) is very low.

May is walking on eggshells

Prime Minister May is apparently prepared to make further concessions in the search for a solution to the Irish border issue, such as an extension of the transition period or (temporary) continued UK membership of the European customs union. This has however increased the tensions in her own party. There are also rumours that conservative supporters of Brexit will try to remove Prime Minister May from office. 

Economic developments: a warm summer helps the economy

This summer’s economic recovery probably only temporary

The UK got off to a weak start this year with GDP volume growth of 0.1 per cent in the first quarter, mainly as a result of bad weather. Growth picked up to 0.4 per cent in the second quarter due mainly to stronger private consumption, driven to some extent by the good weather in the summer months. Higher wages in real terms also improved household spending power in the first half of 2018. This boosted consumption, but there are many factors that could reverse this increase in the coming months. Inflation is rising again (to 2.7 per cent in August 2018), the housing market is cooling and lending is slowing. So far, the uncertainty due to Brexit has mainly affected investment, which contracted in the first half of the year. The uncertainty will probably have more of an effect on sentiment in the private sector in the coming months than it did earlier this year. We expect the economy to grow by 1.2 per cent annualised this year.

The pound is still weak and volatile

In recent months, the pound’s exchange rate has been driven mainly by monetary policy and news on the Brexit negotiations. The central bank raised interest rates again in August to 0.75 per cent. We expect the policy rate to remain steady in the coming period and that Brexit news will be the only driver for the exchange rate. This suggests a lot of volatility. Nonetheless, we expect to see a slight appreciation next year, assuming that the EU and the UK manage to conclude a last-minute deal. With a ‘no-deal’ Brexit, the pound will most likely be substantially devalued and move towards parity with the euro.

Feature: Pre-clearance is essential for exports of fresh products

The value of exports from the Netherlands to the United Kingdom amounts to € 2 billion for vegetables and fruit, € 1.3 billion for meat products, € 1.1 billion for floriculture, € 250 million for dairy, € 200 million for potatoes and € 154 million for sugar beets. The final trade agreement between the UK and the EU is thus hugely important for Dutch agriculture and horticulture.

Customs checks almost inevitable

The trade agreement between the UK and the de EU will include clauses on plant health and veterinary checks, possible import duties and the abolition of automatic payment of VAT. This will change the competitive relationship between the UK and the EU.

In virtually every scenario, customs checks will increase because trade will no longer be intra-EU. For perishable goods such as flowers, plants, vegetables, fruit, dairy and meat, it is essential that these checks do not lead to longer delivery times. Every hour of delay due to checks will affect freshness and therefore quality.

Swift passage of goods is also important for the British ports. On peak days, the port of Dover handles more than 10,000 goods vehicles. Long waiting times cause all sorts of problems at the port, such as queues and poor air quality. If a goods vehicle is ultimately not permitted to enter the UK for any reason, there will be further loss.

Pre-clearance and fast lanes can prevent longer delivery times

To anticipate these situations, it is essential that the customs checks are carried out at the exporter and not at the border. The customs can then check the exporter’s operations on site. This method is already used in several countries for exports of flower bulbs, vegetables and fruit. Known as pre-clearance, this avoids long waiting times at checkpoints. The goods vehicle can move quickly to the customer by using a fast lane, a special lane for goods vehicles that have already been pre-cleared.

A pre-clearance system has to be in place before the transition period between the UK and the EU expires at the end of 2020. It is important that the UK and the EU have sufficient trained customs personnel available and that the UK has an IT system in operation to give pre-clearance a chance of success. So there is a lot to do, but this is certainly of huge importance for Dutch agriculture and horticulture. Whether a pre-clearance system will actually feature among the outcomes of the negotiations between the UK and the EU remains uncertain.

Interview with Best Fresh Group - Mart Valstar

Valstar Holland (part of the Best Fresh Group) has been in existence for 90 years and has been exporting vegetables to the United Kingdom (UK) for 85 years. Each period presents its own challenges, with Brexit just the latest challenge that this business is preparing to meet. We spoke to the director, Mart Valstar.

Waiting times at the border are a cause for concern

“We supply vegetables to the UK on the basis of a daily schedule. The lorries leave on the boat from the Hook of Holland in the morning, or they go through the Channel Tunnel to the UK in the evening. Next morning, the fresh products are on the shelves. Waiting times at the border due to Brexit will disrupt this schedule. The prices for the products delivered to England are based on prices in UK pounds set on a daily basis. If delivery takes longer, we will face an additional risk.”

Higher costs due to the UK’s departure from the customs union

“The uncertainty around Brexit has already led to a substantially lower value for the pound. Obviously, this makes the goods we export more expensive for British consumers. In addition, if the UK leaves the customs union without a deal, WTO rules will apply, meaning there will be an import duty of 11% on our products. Additional customs formalities will add a further 3% in costs. So Brexit means that our products will be substantially more expensive for UK consumers.”

Preparing for the changes

“We currently transport products to countries outside Europe on a daily basis. We have the systems in place to be able to do this for the UK as well. It is possible we will have to take on a few extra people. We have planned a trial for next spring to see the best way of continuing to serve our UK customers after the 29th of March. With good preparation, the potential problems can be converted into opportunities for creating a competitive advantage.”

How can you get the best out of Brexit? Four tips from Mart Valstar:

  1. Stay up to date with the news;
  2. List the potential effects of Brexit for your business;
  3. Practice soon for the situation after 29 March;
  4. Be ready for change - whatever the outcome, there will be changes.
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Author(s)
Alexandra Dumitru
RaboResearch Global Economics & Markets Rabobank KEO
+31 30 21 60441

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