Keith Burge, director of the Institute of Economic Development, writes about why his outlook is gloomy for UK manufacturing regions post-Brexit.
One month until Brexit. It could be the title of a blues song, which given how much it is depressing me would be entirely appropriate right now.
Analysis conducted by the Centre for European Reform (CER) up until June 2018 revealed Brexit was costing the public purse £500m a week. More recent estimates put that figure even higher. According to the CER, the UK economy was already 2.5% smaller than it would have been if the UK had chosen to remain in the EU.
What about going forward? Over a 15-year period the UK economy ought to grow by around 25%, based on a pretty modest projection. However, were the UK to rely on World Trade Organisation (WTO) rules as a basis for trade, this would reduce to 17.3% – 7.7% less than it would otherwise have been. Who says? The Government says, in its Brexit impact studies.
So what? We would still be growing. Well, given the CER report said the loss of 2.5% growth over two years cost the public purse £52bn, it is clear just how serious that loss of growth would be.
And what about regional impacts? Let’s take North East England as an example. 7.7% loss of growth is bad enough, but in the North East, that figure rises to just over 16%. Why is that? Well, in relative terms the North East has more than a third more manufacturing jobs than the UK average – and manufacturing sectors such as chemicals and motor vehicles will be hardest hit by Brexit. In the North East exports account for a higher proportion of GVA than any other English region, delivering a trade surplus in goods. Nearly 60% of the region’s exports are to the EU, dominated by the export of cars.
Under WTO rules there are tariffs of 4.5% on car parts and 10% on cars. In its evidence to the House of Commons International Trade Committee, Nissan said that tariffs would add £500m a year to costs. And if British-based car makers felt they could add 10% to the price of their cars and remain competitive, I suspect they would have done so. It is not just tariffs though. Many UK car plants rely on Just in Time operations, meaning running out of parts is a disaster. Honda reckons that an hour’s lost production costs it several millions of pounds.
So why not stockpile? Honda said that it would take 18 months to set up new procedures and warehouses. Toyota believes if it built such a warehouse it would be the third biggest building on the planet. But remember, Brexit had absolutely no bearing on Honda’s decision to close its Swindon plant. Unless you read the Japanese press.
So why couldn’t the North East rebuild its economy, as it did following the closures of steelworks, shipyards and coalmines? Back then the region’s recovery was driven by its ability to attract international investment – wholly reliant on membership of the Single Market, something the UK will no longer be able to offer.
And then there is the loss of EU funding. Between 2014 and 2020, the UK will receive more than €17bn in Structural and Investment Funds – supporting capital investments that help create jobs and skills development that enable people to take up those opportunities. How can the proposed UK Shared Prosperity Fund compensate for the loss of these funds when the entirety of the UK’s gross contribution to the EU will be going to the NHS?
If the UK does leave the EU on 29th March, we will not find the economy in meltdown the following day, doubtless prompting some to say “look everything’s fine; it was all project fear”. But they would be wrong. Brexit is corrosive. It will eat away at the economy bit by bit.
Twenty jobs lost here, a hundred jobs there, five hundred jobs somewhere else. The new inward investment project that goes to Poznan not Portsmouth. The new product line that goes to a factory in Bratislava not Bradford. The entrepreneur that would have come to the UK but wasn’t welcome. The university graduate forced to return to their country of birth leaving their employer with a vacancy they can’t fill. The financial institution backing an investment in a more stable economy with better growth prospects.
Those of us working in economic development are pragmatists. We do what we can within the parameters that have been set. Pre-Brexit there was (and is) an awful lot to do. Post-Brexit, I fear many of us may spend the rest of our working lives trying to run up the down escalator. With a massive bungee cord wrapped round our waist. But it doesn’t have to be that way…