The hard Brexit has compounded pressures on many UK industries, but some key positives have started to emerge.
By Nick Corbishley for WOLF STREET:
This article is the second installment of a two-part series. The first installment explored some of the darker sides of Brexit that have emerged so far. This second part takes a look at a few of the bright spots that are beginning to shine through.
As British companies grapple with the fallout of Brexit, at the same time as having to contend with the economic pain of yet another lockdown, the benefits of Brexit remain largely elusive. This is to be expected: Brexit, it’s worth repeating, is a process, not an event. It will take time for many of the benefits of leaving the EU to materialize — or at least be felt by the companies or people on the ground in a tangible way. These benefits include being able to make one’s own laws, negotiate trade deals directly with other nations, control one’s own borders, and having greater leeway to support domestic industries.
The impact of these shifts will be huge over time. But for the moment it is outweighed and overshadowed by the combined negative toll of Brexit + Covid. That said, there are a few bright spots.
A Stronger Pound.
A few months ago, the consensus on sterling was decidedly negative. Goldman Sachs was forecasting that the pound would sink to parity against the euro, just as it had predicted it would reach parity with the dollar after the Brexit referendum. Neither has happened.
Instead it has rebounded against most currencies, including the euro and the dollar. On Wednesday February 24, the pound-to-dollar rate hit $1.42, a level not seen since April 18, 2018. Against the euro, it hit its highest level since February 2020. Even after correcting over the next two days, it is still stronger than many had thought.
One obvious reason for this is that the market had already priced in a much more disorderly Brexit than actually happened. When a deal was finally secured, the biggest fears evaporated, allowing the pound to regain some of the ground it had lost over the past year. Some big market players have turned a lot more bullish on both sterling and the UK economy in recent weeks, in part due to the UK government’s vaccine roll-out.
Of course, this sentiment could change over night. Plus, a stronger pound is not good for exporters as it makes exports more expensive, while imports drop in price. And exporters in the UK are already in a world of pain. But if faced with a choice between a crashing or a surging pound straight after Brexit, most would prefer the latter.
The City of London: Diminished But Still Important.
The UK’s all-important financial services sector lost its access to the EU market when the withdrawal agreement transition period came to an end on December 31, 2020. And Brussels appears to have little intention of granting the sector equivalence status any time soon. This came as a major blow to the City of London.
Now, the jewel in its crown — its clearing business — is up for grabs. The EU has allowed London-based firms to continue handling trades for European clients but only until June 2022. After that, banks and other traders could be forced to shift the bulk of their Euro-denominated business to the bloc. The Bank of England governor Andrew Bailey described any wholesale move on London’s clearing business as “very controversial,” adding: “I have to say that would be something we would have to, and want to, resist.”
Given the City’s time-tested ability to withstand and, when necessary, adapt to dramatically changing circumstances, one would be foolish to write off the Square Mile just yet. Brexit may have weakened the UK’s financial services industry but not nearly as much as many had predicted.
Almost five years in, Brexit-related job cuts have so far been minimal. Granted, job openings in the City halved in 2020, but that had a lot to do with the lockdowns. The sector contributed a record £75.6 billion in tax in the last financial year, which runs to March 2020 – a period covering significant uncertainty about the UK’s relationship with the European Union.
Certain markets have even boomed since the Brexit referendum. The UK’s domination of the global forex market has increased from 37% to 43% since 2017 and it is playing an increasing role in the trading of emerging market currencies. It also still accounts for half of the daily $6.5 trillion traded in interest rate derivatives.
London has several important advantages. Its location allows traders to catch the end of the Asian day and the opening on Wall Street. It has a greater concentration of international banks than any other city. It has the infrastructure required for state-of-the-art high-frequency trading, not least the transatlantic cabling landing stations and data centers.
It is also home to roughly 10% of the global fintech market, a sector now worth more than £11 billion a year to the UK economy, according to a new government report. Another benefit London has is the UK’s legal system. “English Law” underpins global financial market trading and is the foundation of many other legal systems around the world. For businesses it has certain key advantages over the civil law systems that predominate on Europe’s mainland, including its predictability, certainty, flexibility, and commerciality.
All of these factors should help to ensure that the City of London will continue to play a major role in global financial markets. But it will probably be a diminished one, which is perhaps not such a bad thing if it leads to a healthy rebalancing of the UK economy toward more productive sectors and away from its current outsized dependence on speculative finance.
Tiny Green Shoots of a New Economy.
Countless companies in the UK, as just about everywhere on planet Earth, are in a battle for survival, as lockdowns, travel restrictions, and social distancing measures have battered industries. A hard Brexit has hugely compounded these pressures. But some companies are actually doing quite well. For example, Liverpool, the UK’s fifth-largest container port has gained traffic from southern rivals as logistics firms try to avoid congestion at the busier Channel crossing points.
Logistics operators serving EU retailers who decided to hold more stock in the UK to ensure they can guarantee delivery times amid border delays have also benefited. They’re not the only ones to increase their investment in post-Brexit Britain. Nissan, which last year had threatened to close down its Sunderland plant — it exports 70% of its production to the EU — has decided instead to center its European car production at Sunderland and invest an additional £1 billion in it over the next few years, including for EV battery production.
In a similar vein, Coventry City Council has entered a Joint Venture partnership with Coventry Airport Ltd to develop plans for a large EV-battery production plant at Coventry Airport, which is ideally located to serve automotive manufacturers based in the West Midlands, including Jaguar Land Rover, Aston Martin Lagonda, BMW and LEVC. Building a “gigafactory” in the West Midlands is considered vital for the success of the EV industry, creating thousands of jobs and attracting up to £2 billion of investment.
The UK’s speedy vaccine roll-out shows that the country is capable of manufacturing and delivering high value-added goods that require complex supply chains. It’s a colossal logistical effort and the UK has managed it better than most other countries — including the 27 EU Member States, giving the UK a head start on other European countries when it comes to reopening the economy this Summer.
“Levelling Up Britain.”
One of the most important lessons of the Brexit referendum was that many of the regions beyond the comfortable confines of South East England were hurting economically. Now, the government has a chance to alleviate some of that pain. Before the 2019 election the government chose to commit wholeheartedly to the multi-billion pound HS2 project, linking London with new high-speed rail to Birmingham and the major Northern cities. This then became the cornerstone of its ‘levelling up’ agenda which helped to swing the election in its favour.
A somewhat diminished City of London could actually help in this effort. The government has already mobilized almost £5 billion to “level up every corner of the UK.”
If it fails in this huge task, the voters can always get rid of it at the next election. And that is one of the ultimate benefits of Brexit: it gives the people somewhat greater control over the political process. Plus, politicians in Westminster can no longer blame Brussels for their own failings.
The crucial services exports, manufacturing exports and imports, the arts & entertainment industry, fishing industry… it’s a mess. Read... The Growing Pains of Brexit, 50 Days In
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