The nature of the trading relationship between the UK and Europe—critical for British exporters—remains highly uncertain. With only 250 days remaining before the UK leaves the EU, the clock is quietly ticking. If negotiations were to fail, UK exporters could face significant tariffs on their products and a commensurate loss of competitiveness. Data on UK sales to the EU since the referendum in mid-2016 suggest that exporters have benefited from the recent strong economic growth in Europe. However, this effect is also fading as EU GDP growth moderates.
In value terms, year-on-year growth in UK goods exports to Europe was mediocre at the time of the referendum, at just 1.1%. But, mirroring the improvement in EU economic growth (and with the help of a low base), the expansion in exports accelerated steadily to a peak of almost 18% by early 2017. This pace was unsustainable—average growth in merchandise exports from 2000 to mid-2016 was 2.5%—and the rate has cooled consistently since then. In May 2018 growth stood at 6.3%, the slowest rate since October 2016, but still comfortably above the long-term average.
A glance at the categories of goods that the UK exports to the EU gives a broad idea of where the growth has come from. In value terms, just over one-quarter of the total increase in UK shipments came from the single-biggest export category: machinery and transport equipment. This includes vehicles, and explains why the automotive industry has been pushing hard for UK to remain within a customs union with the EU. Fuels, which account for only 12% of exports, were responsible for one-fifth of the total, reflecting the strengthening in commodity prices in the past two years. Other sectors have struggled: on a six-month moving average basis, exports of chemicals and of beverages and tobacco were no higher in early 2018 as they were two years earlier.
Recent research by economists at the University of Cambridge showed that uncertainty over the nature of the UK’s future trade with Europe has already had an effect on the decisions of British firms. After controlling for exchange rates, the paper estimated that the number of UK companies that began exporting new products to the EU in 2016 was more than 5% below where it would have been if the UK had voted to remain. It estimates the value of this lost trade at somewhere between £226m and £1.4bn. (The total value of EU exports was £140bn in that year.) The researchers also found a 4% rise in the proportion of British firms opting to end their exports to the EU.
The uncertainty gripping UK exporters, combined with a moderation in demand from Europe, implies that the UK’s reliance on exports to non-EU destinations will grow, at least in the short term. In this regard, the UK’s recent performance has been concerning. Goods exports to the rest of the world have followed a similar path to those to Europe, with a strong 2017 giving way to a weaker 2018. But in April and May exports actually fell on a six-month rolling average basis, relative to the year-earlier period. More positively, part of this can be explained by a high base and the value of non-EU exports is still 13% higher than at the time of referendum. Furthermore, we expect continued healthy growth in economies that the government has identified as priorities for deepening trade—including the US, Australia, India and China—suggesting that macroeconomic conditions appear relatively favourable for stronger British exports to the rest of the world in the next two years. Certainly, a greater emphasis will be placed on this data in the coming months, as the sound of the ticking clock becomes louder still.
