UK Q1 GDP figures expected to be catastrophic. Expect UK exports to have fallen back by up to one fifth in Q1.
Trade will not be the same after the COVID-19 Pandemic.
UK is now in strategic competition between blocs of interest – Russian, Chinese, American and European- Alongside weakning international governance
The Q1 GDP figures this week will be to the economists what the daily Covid 19 death rate statistics have beeen to the medical profession. Export values dropped by some 13% between December 2019 and the end of February 2020. The December figure was a spike compared to the previous quarters, representating perhaps the post-election increase in the value of sterling as much as any thing else, but nevertheless the drop between the two months was sharper even than the decline in trade during the financial crisis. Between January and February the drop was nearly 6%, and that was before the full impact of a global lockdown.
Since then, the global economy has shut down. Around 80% of the world’s trade is carried by sea and since the beginning of the year and now there were over 430 so-called “blank sailings” where shipping lines cancel their journey, between the middle of March and the end of April. The number is expected to increase into May, and DHL’s own register of blank sailings is now nearly twice the level that it was during the financial crisis over a shorter period of time.
Against this backdrop, we shouldn’t expect either the Q1 GDP figures or the UK export figures to be anything other than catastrophic. The manufacturing PMI in April was just 32.6 and services at 13.4, both suggesting a huge contraction. Retail sales for March fell by 5.4% and consumer confidence dropped by 34% in March. Based on simple momentum, it is reasonable to expect exports to have fallen back by as much as one fifth in Q1. UK GDP growth in the three months to February was just 1.1%. The US economy has contracted by 4.8% and the EU27 by some 3.5%. Preliminary forecasts for the UK suggest a 5% contraction in GDP in Q1 with a contraction to May 2020 of nearly 25%. The Bank of England and the OBR suggesting a range of contraction for the year of anything between 14% and 35%. This compares to the Treasury’s compilation of economic forecasts for 2020 in April that suggested a drop in GDP of “just” 5.8%.
The UK faces challenges that are the same as those for the whole world: how to exit from lockdown in a way that refloats the economy without creating a wave of further infections that have yet greater impact on economic growth. These are well-documented challenges that will hinge on the government’s willingness to retain its support to employment and businesses, its financial commitment to rebuilding the economy sustainably in terms of social, environmental and transport infrastructure as well as its capacity, or indeed willingness, to continue to borrow at the current rate. At some point, there has to be a reduction in spending. This is unlikely to be because of the threat to near-term inflation and high interest rates, but rather because the government will naturally return to its small-state roots. This will raise the spectre of austerity again once Covid-19 is no longer the issue it was.
But it’s fair to say that the UK also faces some unique pressures of its very own. It is an open economy and highly dependent on trade. During the financial crisis our exports fell back by 5% more than was the case for the rest of the world; with a projected collapse of up to 32% in world trade, we should brace ourselves for the worst. Trend forecasts would suggest that exports will pick up towards the end of 2020 and start to grow significantly into 2021. But this assumes, by definition, that the UK’s supply chain relationships and the costs of trade remain the same. This will not be the case unless a quick deal on trade can be reached with the EU. At present, this cannot be taken for granted howsoever much economic forecasting models may assume this smooth transition.
Trade will not be the same after the Covid-19 pandemic, of that we can be quite sure. We are already seeing greater distribution of inventories around the world to reduce reliance on single suppliers in a “just-in-time” inventory system. The role of China as the world’s supplier will change as a result – there will be more sources of intermediate manufactured goods around the world so that supply chains do not grind to a halt, but while its role may change, its influence economically and technologically will remain. This is one of the reasons why we cannot expect to see a reduction in the trade tensions between the US and China – if anything, trade will become more of a strategic game built on the quest for control over flows of finance and flows of data between the two. Expect the World Trade Organisation to become weaker still as a result. Nations have already broken the “level playing field” principles by increasing State Aid and imposing export restrictions on medical and food supply chains. It will be hard for it to resume its authority after the pandemic.
Can the UK survive all this? It can, if it recognises that its supply chains will change. The role of manufacturing in the UK economy may be less significant. Its allies including the US and the EU are engaged in the same, existential, strategic competition with China alongside a national battle for survival. The consequence could be that the UK may slip to the back of the queue for no other reason than that there are other strategic priorities. A lot will depend on how others behave.
That is the essence of where the UK is now: in a strategic competition between blocs of interest – Russian, Chinese, American and European – alongside weakening international governance. The behaviours of others matter because they will affect our plans, not just in terms of our economy but also in terms of our security. British exceptionalism in this landscape is not sustainable and we need to think, and plan, for our post-Covid 19 place in the world against this backdrop of increased nationalism and shifting spheres of influence. Covid-19 should demonstrate how interdependent the world is; we should not be frightened now of re-affirming our commitment to multilateralism in trade and foreign policy if we are to keep our seat at the table.