The effects of the Brexit trade deal are becoming clearer as new data are released. Figures for UK food imports and exports from and to the EU for the first quarter of 2021 have been published by the Food and Drink Federation. These show a 46.6% fall in UK food and drink exports to the EU in Q1 2021 when compared with Q1 2020, and a 55.1% fall when compared with Q1 2019 (before COVID).
The dairy sector has been the hardest hit, with exports of milk and cream to the EU down by more than 90% and exports of cheese down by 67% compared with Q1 2020. Other hard-hit sectors have been soft drinks, fish, potatoes and chicken. (Click here for a PowerPoint of the following chart.)
The Brexit trade deal did not involve the imposition of tariffs on exports and imports. However, with the UK having left the EU single market, there are now many regulatory checks and a considerable amount of paperwork to be completed for each consignment of exports. These frictions are slowing down trade and adding to costs. Although food and drink exports are beginning to recover somewhat, the delays while formalities are completed will have a lasting dampening effect on exports to the EU, especially in the case of perishable goods, such as meat and fish.
Also, farming has been badly affected by labour shortages, with many EU citizens returning to the EU. For example, according to the British Poultry Council (BPC), 10 per cent fewer chickens had been produced since Easter because of worker shortages. Across meat processing generally, similar shortfalls are being recorded because of a lack of labour.
Articles
Questions
- Find out how exports to the EU from sectors other than food and drink have fared since January this year.
- What are rules of origin? Why are they less likely to apply to food exports to the EU than to manufactured exports?
- Would you describe the Brexit trade deal (the EU-UK Trade and Cooperation Agreement) as a ‘free-trade’ deal? Explain.
- What are the particular difficulties for the food and drink sector in the Trade and Cooperation Agreement?
- Find out which parts of the food and drink sector have been particularly affected by labour shortages.
In a recent blog, Falling sterling – bad for some; good for others, we looked at the depreciation of sterling following the Brexit vote. We saw how it will have beneficial effects for some, such as exporters, and adverse effects for others, such as consumers having to pay a higher price for imports and foreign holidays. The article linked below examines these effects in more depth.
Just how much the quantity of exports will increase depends on two main things. The first is the amount by which the foreign currency price falls. This depends on what exporters choose to do. Say the pound falls from €1.30 to €1.18. Do exporters who had previously sold a product selling in the UK for £100 and in the eurozone for €130, now reduce the euro price to €118? Or do they put it down by less – say, to €125, thereby earning £105.93 (£(125/1.18)). Their sales would increase by less, but their profit margin would rise.
The second is the foreign currency price elasticity of demand for exports in the foreign markets. The more elastic it is, the more exports will rise for any given euro price reduction.
It is similar with imports. How much the sales of these fall depends again on two main things. The first is the amount by which the importing companies are prepared to raise sterling prices. Again assume that the pound falls from €1.30 to €1.18 – in other words, the euro rises from 76.92p (£1/1.3) to 84.75p (£1/1.18). What happens to the price of an import to the UK from the eurozone whose euro price is €100? Does the importer raise the price from £76.92 to £84.75, or by less than that, being prepared to accept a smaller profit margin?
The second is the sterling price elasticity of demand for imports in the UK. The more elastic it is, the more imports will fall and, probably, the more the importer will be prepared to limit the sterling price increase.
The article also looks at the effect on aggregate demand. As we saw in the previous blog, a depreciation boosts aggregate demand by increasing exports and curbing imports. The effects of this rise in aggregate demand depends on the degree of slack in the economy and the extent, therefore, that (a) exporters and those producing import substitutes can respond in terms of high production and employment and (b) other sectors can produce more as multiplier effects play out.
Finally, the article looks at the effect of the depreciation of sterling on asset prices. UK assets will be worth less in foreign currency terms; foreign assets will be worth more in sterling. Just how much the prices of internationally traded assets, such as shares and some property, will change depends, again, on their price elasticities of demand. In terms of assets, there has been a gain to UK balance sheets from the depreciation. As Roger Bootle says:
Whereas the overwhelming majority of the UK’s liabilities to foreigners are denominated in sterling, the overwhelming bulk of our assets abroad are denominated in foreign currency. So the lower pound has raised the sterling value of our overseas assets while leaving the sterling value of our liabilities more or less unchanged.
Article
How a lower pound will help us to escape cloud cuckoo land, The Telegraph, Roger Bootle (31/7/16)
Questions
- What determines the amount that exporters from the UK adjust the foreign currency price of their exports following a depreciation of sterling?
- What determines the amount by which importers to the UK adjust the sterling price of their products following a depreciation of sterling?
- What determines the amount by which sterling will depreciate over the coming months?
- Distinguish between stabilising and destabilising speculation? How does this apply to exchange rates and what determines the likelihood of there being destabilising speculation against sterling exchange rates?
- How is UK inflation likely to be affected by a depreciation of sterling?
- Why does Roger Bootle believe that the UK has been living in ‘cloud cuckoo land’ with respect to exchange rates?
- Why has the UK managed to sustain a large current account deficit over so many years?
In the UK, petrol prices have fallen significantly over the past couple of years and currently stand in some places at below £1 per litre. For UK residents, this price is seen as being cheap, but if we compare it to prices in Venezuela, we get quite a different picture. Prices are increasing here for the first time in 20 years from $0.01 per litre to $0.60 per litre – around 40 pence, while lower grade petrol increases to $0.10 per litre.
Venezuela has oil fields in abundance, but has not used this natural resource to its full potential to bolster the struggling economy. The price of petrol has been heavily subsidised for decades and the removal of this subsidy is expected to save around $800 million per year.
This will be important for the economy, given its poor economic growth, high inflation and shortages of some basic products. Venezuela relies on oil as the main component of its export revenues and so it has been hit very badly, by such low oil prices. The money from this reduced subsidy will be used to help social programmes across the country, which over time should help the economy.
In addition to this reduced subsidy on petrol prices, Venezuela’s President has also taken steps to devalue the exchange rate. This will help to boost the economy’s competitiveness and so is another policy being implemented to help the economy. However, some analysts have said that these changes don’t go far enough, calling them ‘small steps’, ‘nowhere near what is required’ and ‘late and insufficient’. The following articles consider the Venezuelan crisis and policies.
Venezuela raises petrol price for first time in 20 years BBC News (18/02/16)
Venezuela president raises fuel price by 6,000% and devalues bolivar to tackle crisis The Guardian, Sibylla Brodzinsky (18/02/16)
Venezuela’s Maduro devalues currency and raises gasoline prices Financial Times, Andres Schipani (18/02/16)
Venezuela hikes gasoline price for first time in 20 years The Economic Times (18/02/16)
Venezuela hikes fuel prices by 6000%, devalues currency to tackle economic crisis International Business Times, Avaneesh Pandey (18/02/16)
Market dislikes Venezuela reforms but debt rallies again Reuters (18/02/16)
Questions
- Why are oil prices so important for the Venezuelan economy?
- How will they affect the country’s export revenues and hence aggregate demand?
- Inflation in Venezuela has been very high recently. What is the cause of such high inflation? Illustrate this using an aggregate demand/aggregate supply diagram.
- How will a devaluation of the currency help Venezuela? How does this differ from a depreciation?
- Petrol prices have been subsidised in Venezuela for 20 years. Show how this government subsidy has affected petrol prices. Now that this subsidy is being reduced, how will this affect prices – show this on your diagram.
- Why are many analysts suggesting that these policies are insufficient to help the Venezuelan economy?
Europe’s largest economy is Germany and the prospects and growth figures of this country are crucial to the growth of the Eurozone as a whole. The EU is a key trading partner for the UK and hence the growth data of Germany and in turn of the Eurozone is also essential in creating buoyant economic conditions within our borders. The bad news is that the economic growth forecast for Germany has been cut by the German government.
The German government had previously estimated that the growth rate for this year would be 1.8%, but the estimate has now been revised down to 1.2% and next year’s growth rate has also been revised downwards from 2% to 1.3%. Clearly the expectation is that low growth is set to continue.
Whenever there are changes in macroeconomic variables, a key question is always about the cause of such change, for example is inflation caused by demand-pull or cost-push factors. The German government has been quick to state that the lower growth rates are not due to internal factors, but have been affected by external factors, in particular the state of the global economy. As such, there are no plans to make significant changes to domestic policy, as the domestic economy remains in a strong position. The economy Minister said:
“The German economy finds itself in difficult external waters … Domestic economic forces remain intact, with the robust labour market forming the foundation … As soon as the international environment improves, the competitiveness of German companies will bear fruit and the German economy will return to a path of solid growth … [for this reason there is] no reason to abandon or change our economic or fiscal policy.”
The global picture remains relatively weak and while some economies, including the UK, have seen growth pick up and unemployment fall, there are concerns that the economic recovery is beginning to slow. With an increasingly interdependent world, the slowing down of one economy can have a significant impact on the growth rate of others. If country A begins to slow, demand for imports will fall and this means a fall in the demand for exports of country B. For countries that are dependent on exports, such as Germany and China, a fall in the demand for exports can mean a big decline in aggregate demand and in August, Germany saw a 5.8% drop in exports.
Adding to the gloom is data on inflation, suggesting that some other key economies have seen falls in the rate of inflation, including China. The possibility of a triple-dip recession for the Eurozone has now been suggested and with its largest economy beginning to struggle, this suggestion may become more real. The following articles consider the macroeconomic picture.
Articles
Germany cuts growth forecasts amid recession fears, as Ireland unveils budget The Guardian, Graeme Wearden (14/10/14)
As cracks in its economy widen, is Germany’s miracle about to fade? The Observer, Philip Oltermann (19/10/14)
Why the German economy is in a rut The Economist (21/10/14)
Germany’s flagging economy: Build some bridges and roads, Mrs Merkel The Economist (18/10/14)
Germany cuts 2014 growth forecast from 1.8% to 1.2% BBC News (14/10/14)
IMF to cut growth forecast for Germany – der Spiegel Reuters (5/10/14)
Fears of triple-dip eurozone recession, as Germany cuts growth forecast The Guardian, Phillip Inman (15/10/14)
Germany slashes its economic forecasts Financial Times, Stefan Wagstyl (14/10/14)
Merkel vows austerity even as growth projection cut Bloomberg, Brian Parkin, Rainer Buergin and Patrick Donahue (14/10/14)
Is Europe’s economic motor finally stalling? BBC News, Damien McGuinness (17/10/14)
Why Germany won’t fight deflation BBC News, Robert Peston (16/10/14)
Data
World Economic Outlook Database IMF (15/10/14)
World Economic Outlook IMF (October 2014)
Questions
- How do we measure economic growth and is it a good indicator of the state of an economy?
- What are the key external factors identified by the Germany government as the reasons behind the decline in economic growth?
- Angela Merkel has said that austerity measures will continue to balance the budget. Is this a sensible strategy given the revised growth figures?
- Why is low inflation in other economies further bad news for those countries that have seen a decline or a slowdown in their growth figures?
- Why is interdependence between nations both a good and a bad thing?
- Using AS and AD analysis, illustrate the reasons behind the decline German growth. Based on your analysis, what might be expected to happen to some of the other key macroeconomic variables in Germany and in other Eurozone economies?
The Scottish debate revolved around a variety of issues and one of the key factors that added weight to the ‘No’ campaign was the idea of being British. But the concept of ‘Britishness’ is not just important to those who live here. It still appears to be a key signal of quality in foreign markets and it is something which foreign consumers are willing to pay a price for.
Barclays Corporate Banking has undertaken research into eight key export markets to determine the value of ‘Britain’. One of the key factors that boost demand for a product is quality and another is the idea of a brand. As quality improves and brands become more recognized, a product’s demand curve will begin to shift to the right, thus pushing up the market price. In other words, with higher quality and brand recognition, an individual’s willingness to pay rises. One brand that foreign consumers seem willing to pay a premium to purchase are those labelled ‘Made in Britain’.
The research indicates that 31% of customers in emerging markets have been prepared to and have purchased products that are from Britain, despite the higher price. Seeing the label ‘Made in Britain’ seems to send the signal of quality and this in turn creates a higher willingness to pay. Furthermore, this willingness to pay, while still good for Scottish, English and Welsh products, is higher for ‘British’ products, perhaps another indication of the truth behind the ‘Better together’ campaign.
The increase in willingness to pay between products with seemingly no country of origin and a British country of origin is 7% and this knowledge should give a confidence boost to the British export market. It should also indicate to exporters in Wales, Scotland and England that they are better to advertise as ‘Made in Britain’ than ‘Made in Wales, Scotland or England’. The expected boost from the 8 key emerging markets is around £2bn. The following articles consider the concept of ‘Brand Britain’.
Good news for exports as Brand Britain is revealed to be valuable concept Small Business, John Bromley (3/11/14)
Britain ‘best brand’ for Welsh exports, survey suggests BBC News (26/11/11)
Overseas consumers 64% more willing to pay premium for ‘Brand Britain’ Marketing Week, Sebastian Joseph (3/11/14)
Report flags up ‘British’ benefit The Courier, James Williamson (3/10/14)
Questions
- Using a diagram, illustrate the effect of a product’s being a well-known brand on its equilibrium price and quantity.
- Why is it that the relative willingness to pay a premium for British products is higher in developing countries than in developed countries?
- Using the concept of marginal utility theory, explain the impact of the ‘Made in Britain’ label.
- The BBC News article suggests, however, that some Welsh companies have not found the brand effect to be the case. What factors might explain this?
- To what extent are the concepts of consumer and producer surplus relevant here?
