Trajectory is apolitical, and it is not our place as an organisation to take a stance on Brexit. However, Brexit is of great importance to our clients, so we cannot ignore it either. We presented a balanced view of different Brexit scenarios and their likely implications at our March Trends Breakfast.
Since March the possibility of one of those scenarios, a ‘No Deal’ Brexit, appears to have increased. Liam Fox was possibly exaggerating when he recently said that the odds are 60:40 in favour of No Deal, but we must take this scenario increasingly seriously.
No Deal is the default scenario if no agreement can be reached. The UK would no longer be bound by the EU treaties and there would be nothing to replace the thousands of international agreements that stem from them. Supporters would see this as a clean and pure Brexit. A fully sovereign Britain would be able to strike agreements with anyone unencumbered by its on-going relationship with the EU. From this position, Britain could negotiate new relationships with the EU and other countries based on mutual advantage.
However, critics say it would result in disruption on a scale rarely seen in peacetime, affecting almost every business in Britain. WTO tariffs on goods would be imposed at tightly controlled borders. The lack of customs facilitation deals would disrupt trade, and so on. These impacts would start immediately in March 2019, as no transition deal would be in place.
In June 2017, the FT described this scenario as follows:
“It is simply not a viable option. There are almost no winners and the UK would be pursued in international courts for money the EU claims it owes……most officials concede this would be a self-inflicted wound of historic proportions.”
Food production is an interesting example to consider in the event of No Deal. The UK only produces 50% of its own food (ONS assessment, based on farm gate value of unprocessed food in 2017), with 30% coming from the EU. Africa, North America, South America and Asia each provide a 4% share of the food consumed in the UK. This means that WTO tariffs could be applied to the 30% of the UK’s food that comes from the EU for the first time in more than 40 years. We say ‘could’ because the UK does not have to impose tariffs on food. However, under WTO rules, it would have to treat all source markets equally and could not pick and choose countries on which to impose food tariffs. The UK would be faced with a choice of applying tariffs to EU-sourced food for the first time in decades, or unilaterally abandoning tariffs on food sourced from outside the EU for the first time in decades. The latter option would also imply the UK undermining its own negotiating position in future trade deals with non-EU countries, if zero tariffs for food imports were already conceded.
Most analysts agree that a No Deal Brexit would result in the application of some tariffs on EU food and significantly increased food price inflation in 2019. Some of these tariffs are substantial – in the region of 40% for some goods (such as cheese) and 20% for some staples (such as certain types of vegetable). This would add to food price inflation that is already expected because of this year’s extreme weather conditions.
The impact of food price rises would not be evenly felt. Though poorer households spend less on food in absolute terms than more affluent ones, a great proportion of their overall household budgets go on food. For example, consumers in the lowest income decile spend over 60% of their weekly household budget on food, compared to just under 30% for consumers in the highest income decile (Source: ONS, 2016). Increased food price inflation would hit the poorest households hardest, not just affecting their food shopping habits and spend, but also potentially affecting the money allocated to every other sector from leisure to life assurance.
We will be monitoring the impact of these and other developments on the consumer mood in the months leading up to the UK’s exit from the EU in March 2019 as part of Trajectory’s new Optimism Index which will be launched in September 2018. The index is a new and sophisticated tool for measuring the mood of the nation from a range of perspectives including reactions to social, economic and technological change.
For more information on the Optimism Index, and our new subscription service, Signal, please contact email@example.com.