Blain’s Morning Porridge Feb 14th: Brexit – when is the UK going to wake up to the brutal reality?
“Flash, I love you, but we only have 14 hours to save the Earth!”
This morning: It’s time to stop kidding ourselves. Brexit promised much but has been a disaster. The economy is contracting, investment in growth has collapsed, and there are no signs of Brexit bonuses. Time for a reset.
Happy Valentines Day. May you all find love. I know the way to my true-love’s heart – a cup of tea in the morning.
I learnt many years ago a very simple rule: we have nobody to blame but ourselves. If we can’t be honest when we make mistakes – we achieve nothing. As always, when I pontificate about Europe, let me caveat my comments with the admission I voted for Brexit. It seemed such an attractive idea at the time… We dream big, but live with the consequences. Sometimes we need to admit mistakes.
Last week the UK avoided being labelled in “recession” through the technical dodge of declaring 0.00000% growth is not contraction. (Actually it is – but why argue how many failed ministers can sit on the pointy end of a sharp pin..) The UK economy is still 0.8% smaller than it was pre-covid in Q4 2019. The US has grown 5.1% in the same period, Europe by 2.4%. The IMF expects the UK to contract by 0.6% in 2023 – a “less gloomy” forecast than previously made, but the UK will be the only G7 nation to see its economy shrink.
According to Jonathan Haskel, a member of the Bank of England’s Monetary Policy Committee, the UK has taken a £29 billion hit to business investment since the June 2016 Brexit Vote. Far from economic growth on the back of “Brexit Freedoms”, Private investment has “stopped in its tracks” he said. That should be a massive smell-the-coffee moment for anyone running UK investments.
The one thing Liz Truss got right was the need for growth. She had nary a breeze (no idea and vague policies) on how to achieve it, but underinvestment in UK businesses, over the course of 7 long years of political turmoil and directionless leadership has proved absolutely not how to generate growth.
Since 2016 the UK has watched in mounting despair as the Brexit dream turned into a quagmire of political infighting, multiple prime ministers, and confabulations on our relationship to Europe. We thought it was about negotiating with Brussels (it was), trade deals (it was), tax cuts (maybe), and freeing up the economy from bureaucracy (maybe). There were no see-um shocks like Covid and Ukraine. Then we had the self-inflicted political travesty of Truss/Kwarteng followed by the extreme economic orthodoxy of austerity the current government feels it has no choice but to adopt as a result. It’s been a period of extraordinary political dither. One step forward and three or four back.
Buried in the incompetency have been the really, really, really, important issues – growing the economy, making it more competitive, improving productivity, and boosting the UK as a global partner. Apparently, no one spotted it hasn’t been happening….
What the MPC’s Haskel has identified in terms of private investment is critical: chronic underinvestment into UK business these past 7 years. That is nailed-on to cause massive long-term and long-lasting consequences for the economy. Collectively they will have a massive impact on how investible the economy will become over the future.
A graph in the FT sums it up: the UK is now 30 points below the 2009-2016 trend-line in terms of business investment. That translates into a nation that will be hamstrung for years of zero productivity and missed new jobs growth, making the UK and UK businesses less investible as the economy continues to perform sub-par. Think about it as 7 years of industrial somnambulance and political naval-gazing as the rest of the world shot off to the far horizon.
The underinvestment crisis is brought into focus by AstraZeneca building a new £340mm vaccine facility in Ireland rather than the UK. Or Shell announcing it will scale back North Sea investments because of Windfall taxes (ok – I thought they were a necessary evil.) The bottom line is global companies thinking of investing in the UK smell blood in the water, and are looking for subsidies, co-investments, “special treatment” – because they know the UK is weak. They want incentives and deals on corporation tax, set-up costs, and support – otherwise they go to the next best bidder. They aren’t getting it from a government convinced the only way back to prosperity is higher taxes and real wage cuts. I don’t know where they learnt their economics, but it wasn’t the university I went to.
Look at it from the perspective of potential investment into the UK: why build a plant here when high quality labour is scarce, the education system is increasingly dysfunctional, homes are unaffordable, private healthcare costs are going through the roof as the NHS collapses, the infrastructure of roads, rails, ports are broken, a nation still vulnerable to energy scarcity because we can’t agree how to reopen gas storage, planning which will take decades, its cut itself off from dialog, and even then.. who knows what the next act of political incompetency will be?
Where has all the investment the UK has missed gone? Europe has announced it will dodge recession this year and expects 0.9% growth – although Germany may still contract. The Bank of England reckons UK trade with Europe is up to 15% lower today than it would have been if we had not voted to leave. That translates into an ongoing 3.2% hit on the UK’s GDP.
As I said earlier, we need to be honest about the problems. Fortunately (mild sarcasm alert coming), UK politicians are all over the problem.
Last week Labour and Tory politicians (including Michael Gove and David Lammy), leading businessmen, senior bankers and academics met (in secret – which is why everyone knows about it) to address how badly Brexit has failed. The meeting was entitled: “How can we make Brexit work better with our neighbours in Europe.” The meeting concluded Brexit is “acting as drag on our growth, and inhibiting the UK’s potential.” No sh*t Sherlock.
I am reliably informed by my moles within the Swiss Cheese that is Tory HQ how Rishi Sunak has become a closet Brexit regretter, and now reckons a deal with Europe could save the Tories at the next election. Dream on…
If that potentially rational perspective became public knowledge, he will be toast tomorrow because Brexit is an irrefutable cannon truth among the “stauncher” denizens of what we despairingly call the UK’s leadership. (To be honest…. I’d rather have Sunak genuflecting to Brussels than Boris back… because that is what will happen the moment he says “perhaps we should talk…”)
(Note for Non-Brit readers: Staunch – this is how we describe ultra-loyalist Protestant Orangemen in Northern Ireland who remain true to being British to the exclusion of all else. The rest of us think of them as an extreme brand of Irish. They don’t like that. Since they can hold the swing vote in the UK Parliament politicians need to play nice with them. They are now a minority in Norn Irn and will become a historical footnote.)
Yet again, I can only conclude the only way out this mess is to cut the current political impasse – and elect a new government. Labour won’t undo Brexit or re-join the EU, but they don’t carry the Tory baggage and they can reopen the doors to cooperation. Or we can stick with the current crisis. At least we get progression with this government: Egg, Frying Pan, Nuclear Inferno…
Lest we forget, the UK economy remains smaller than pre-Covid. We are no longer really a G7 economy. India should probably have our seat. The Office for Budget Responsibility has calculated the UK economy will be 4% smaller than it could have been in 2030 because of Brexit. Around the globe maturing economies in Asia remain in serious expansion mode – by the time I retire we might not even be getting invites to G20 meetings.
Finally, on a personal note – I am confident later today I will receive a missive from my dear old friend D**g, (name obscured to protect the guilty) a prominent Brexiteer, (who last hit the headlines for being elected a local councillor alongside Liz Truss about a billion years ago), telling me I never write about the multiple successes of Brexit. He’s right. I don’t. That’s because I can’t think of any – and I voted for it. (Seriously Doug.. absolutely love you, but we really do need to do something about Brexit before we are buried by it.)
Five other things to think about this morning
ZeroHedge CPI: Everyone Expects a Hotter Print
Out of time and back to the day-job…
Strategist – Shard Capital