Wednesday, 30 January 2019

What they're not telling you about no-deal

For more than two years now we've seen a torrent of warnings over what will happen if there's no deal. Most of it is easily written off as "project fear". There are too reasons for this. Firstly, media trivialisation. Interruptions to medicines supply chains taken to their mire extreme conclusions results in an outbreak of "super-gonorrhoea". This then allows propagandists on the leave side to exploit the trivialisation and the warning becomes more useful to the leave side than remain.

The second problem, which is perhaps more serious, is that industry bodies reeling off these dire warnings have little idea how the system presently works so from a position of ignorance are unable to say with any accuracy what will happen if it is changed.

This is especially the case over warnings of food shortages which have been wildly misunderstood. The government has announced that it will not change the inspection regime for incoming goods. The government, therefore, does not anticipate too many problems. The problem though, which is why we've resorted to stockpiling, is that nobody can say exactly what happens to outgoing freight. The EU most certainly will uphold its third country controls. It is, therefore, a certainty that there will be some disruption to port operations and some freight will have to be diverted.

The extent to which that becomes a problem is not known. On Brexit day the media will congregate on the M20 in anticipation of reporting on the queues, but many production lines have already factored in the possibility of disruption this have stocked up on parts and supplies. Outwardly, Brexit day could be a complete non-event. Haulage companies, not being clear on what may transpire will have already scheduled in anticipation of disruption so may stay clear of the ports until they know the lay of the land.

The problem then is that if you don't have outgoing truck then you have a fleet capacity problem for incoming trucks. That's where the danger of shortages arisis. In anticipation of this, supermarkets have stockpiled so far as they can (being that there is limited warehousing thanks to the JIT nature of their business), which means that UK hauliers will instead be going back and forth from those warehouses.

Course, that's a real problem for the remoaners. If it "port chaos" doesn't happen then Brexiters can claim it as a propaganda victory. It could take weeks or even months for the problems to become apparent. Chances are it won't see the shelves stripped bare save for a little last minute panic buying, but what we will see is reduced availability of some items that will simply look like a stocking problem.

A lot has happened since it first dawned on government that port disruption was a possibility and though we are not blessed with an abundance of competence, in government the civil service have people on standby to manage the problems and the private sector will have made its own contingency plans. More to the point, with the imposition of tariffs and costs from route diversion, some businesses may immediately conclude there is no profit in exporting at all. That sees an instant reduction in traffic as some goods simply cannot compete.

The impact may also be mitigated by way of phased implementation of Calais side controls. It could be some months before their system of controls is fully up and running and won't seek to stop freight until they have the capacity to do so. It is entirely possible that all of the headline warnings do not come to pass. With Brexit day being on a Friday, the ports are less busy anyway.

Meanwhile there are plenty of ways the headlines effects could be masked. Domestic food producers having lost their export market will seek to dump their surpluses on the UK market which could see an almost immediate collapse in prices - especially for fresh produce. This again is bad news for remainers because the likes of Guido will exploit the price drop as evidence of Brexit being an overnight success. It won't be until some months later when the economies of scale correct themselves and prices start to climb.

More inconveniently, the effects won't necessarily be detected for a while. The instant recession promised by all won't happen - which again will be taken as good news but this fails to note that GDP is not a useful indicator. It tells us lots of things are happening in the economy but gives us no direction as to the trends in trade.  Much of the activity will come from businesses restructuring and adapting to change.

It is highly likely that the adverse effects will not manifest for some months - but by then we will start to see a major drop off in values of trade. Job losses are trailing indicator which won't be fully realised until a while after. At first it will be drops of bad news from various independent sectoral analyses followed by a flood. It could be up to eight months before we get an idea of what's happening by which time we see the pound sliding and the beginnings of rampant inflation.

This is when we are most likely to see rationing of essentials. It won't be a supply problem. It will be a price problem. Obviously we can't ration life saving medicines so the cuts will have to come from elsewhere. To a large extent the effects of no deal Brexit have been woefully misreported, partly because we have a wholly inadequate media but much of what has been predicted may come to pass though in much more subtle ways - possibly not even reported immediately by the media and not always obviously attributable to Brexit.

The Brexiters will be able to hold the propaganda line for at least six months, putting the headline effects down to temporary blips and they can save their own skin if things hold together for a year - but by the second year we will have a far fuller picture as the issues start to snowball. The regulatory inconveniences and the exclusion from services markets will become a lot more apparent and the trade imbalance will widen significantly. It could take some time for this to be registered in terms of GDP.

This is not to say there will not be mitigating trends. If road haulage viability drops off we could very easily see increased volumes in air freight. The private sector is good at finding ways around obstacles and there are levers the UK government could pull that it couldn't pull as an EU member but over all the prognosis is grim for the intermediate term. The longer term all depends on correcting the political dysfunction within Westminster.

Remainers pegging their hopes on an overnight armageddon to prove to Brexiters they were foolish might every well end up with egg on their faces. The Brexiters will strut around as though they were right all along and reassert on to their predictions of sunlit uplands but no-deal is far more likely to be an exponential hollowing out of export activity - depriving government of the income it budgeted for - leading to a swathe of cuts and increased borrowing.

There is much we don't know about how a no deal Brexit will play out. The government has thrown all of its energies into mitigating the port issues but there is no possible way it can account for the full spectrum of problems largely because they are not known. You can't plan for chaos. You can only hope to survive it. This sees government redirecting civil service resources thus interrupting the normal functioning of government which in turn creates its own problems. Spending plans are frozen and infrastructure projects are cancelled.

Should the UK leave without a deal the government will have to act fast. The EU has set upon a number of contingency measures and will be prepared to grant some concessions to the EU but only on a reciprocal basis. It will do only the bare minimum in its own immediate self-interest. It will be some time before there is a renewed negotiation processes and a while longer before there is any formal trade accord in place. We could even be waiting a decade - and we will have already have surrendered what leverage we have through reciprocal contingency measures.

For anyone who voted for an extreme makeover of the UK, their wish is about to be granted. We cannot account for the ways in which it may unleash the more intangible potential of Britain nor indeed can we discount the "human capital" we have in terms of an educated and newly motivated public. We had simply better hope that we are more capable than our politicians. What we can say with certainty is that we will need every advantage we have - because Britain is never going to be a the same again - for better or for worse.

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