Written by 8:15 am EU Investment

Lunching on the FT | Derrick Berthelsen

Recently, The Critic published my article outlining the FT’s anti-Brexit bias and how “it infects every article written, every analysis made, every context included in order to ensure Brexit is presented as an entirely negative and irredeemable event.” 

On Friday, Giles doubled down

The article was prompted by a tweet from FT Economics Editor Chris Giles on the UK’s deteriorating balance of trade in which he commented “In other news, I hear #Brexit is going swimmingly”.

After demonstrating that Brexit was not the cause of the trade deterioration — hello oil and gas prices! — I went on to give examples of how the FT’s coverage is directed towards denigrating Brexit and pushing for closer relations with the EU.

I was contacted by a number of people who had communicated with Giles regarding my article to say his response had been that the tweet was “tongue in cheek” and wasn’t meant as a “serious piece of analysis”, and directing them to read an FT article from June 20th 2022, for a serious analysis of the “economic fallout” caused by Brexit.

On Friday, Giles doubled down, tweeting about German GDP revisions and adding the comment “#I still hear Brexit is going swimmingly.”

I will leave the reader to decide if these comment(s) were really meant “tongue in cheek”, but I would like to take a look in detail at the “serious piece of analysis” he directed people to read.

The article outlines where the FT believes Brexit has hurt the UK economy (and pushes the idea of closer UK/EU relations i.e. re-joining the single market).

I will take the points in turn. First, the FT considers the fall in the pound, saying:

The first and most obvious economic blow delivered by Brexit came when sterling fell almost 10 per cent after the referendum in June 2016, against currencies that match the UK’s pattern of imports

I covered this in my original article, but for completeness — yes, the pound did fall about 10 per cent after the referendum result. But this doesn’t put the valuation of sterling into context. On the narrow GBP trade-weighted index in real terms, GBP is trading about average for the last 15 years, the Bank of England & IMF both declared sterling 5-20 per cent overvalued in 2015 and the large decline in £/euro rate occurred after the Great Financial Crash, not the referendum result.

“The fall in the pound was not followed by a boon in exports,” claims the FT. The chart below shows the export of goods & services figures for the UK, Germany, France & Italy (indexed Q12015). As you can see, UK exports considerably outpaced the three largest EU members after the Brexit referendum and were accelerating right up until Covid hit, in part as a result of the fall in the pound. 

It is true, however, that the export recovery post Covid/the end of the Brexit transition period has been lacklustre versus the period before (more on that later).

The FT claimed that Brexit led to an increase in UK inflation. Yes, UK inflation has outpaced that of Germany, France & Italy but as the chart below demonstrates, that began well before Brexit. Indeed it appears the catalyst was the GFC in 2008.

Plus (as the following chart illustrates) UK inflation in the period 2015-2021 averaged only 1.6 per cent per annum – below the 2 per cent inflation target set by the Bank of England and equal to the average inflation rate over the period for the whole G7. The EU average of 1.2 per cen pa was achieved during a period when Central Banks globally were trying to encourage higher not lower inflation.  

“Brexit led to an increase in UK food inflation,” the FT claims. Whilst there is some evidence of increased prices for specific food imports since Brexit, overall UK food inflation has been subdued & considerably below the levels seen in the rest of Europe (as the chart below illustrates).

Indeed UK food inflation in the period 2015-2021 only averaged 0.3 per cent pa vs 1.6 per cent pa for the EU & 1.2 per cent pa for the G7. It would appear the area in the developed world with a food inflation issue is the EU.

 

To put UK food prices into perspective, here is a chart comparing food prices in Europe from 2018. As you can see UK food prices are amongst the lowest in Europe.

And despite the recent rises in food prices (not a result of Brexit), UK food inflation remains below the EU as you can see below.

“The third visible effect of Brexit on the UK economy has been in discouraging business investment” apparently. The FT claims that Brexit has discouraged business investment and published the chart below to demonstrate that point. Whilst I have no doubt that uncertainty regarding the ultimate UK/EU trading terms weighed on investment after the 2016 referendum, I believe the FT exaggerates the impact & has presented a chart which is very misleading.

I have taken the same data source used by the FT (ONS) & constructed the chart below looking at business investment from 1997 to Q2 2022. As you can see, business investment was hit hard by the GFC in 2008 & only began to recover from Q2 2009.

Coincidentally, the FT has chosen to base its trend line from this exact quarter, maybe because by doing so it provides a false idea of the long term trend rate of UK business investment because it contains post GFC catch up.  

My chart looks at the long term trend line of UK business investment since 1997, and as you can see business investment is currently running at the long term trend having caught up after the post-Covid crash.

Because it is clear that UK business investment has been significantly affected by the GFC and Covid fallout, it is instructive to compare UK investment versus EU peers — Germany, France & Italy. 

It is difficult to get comparable data for just business investment so instead I use OECD figures for Gross Fixed Capital Formation (GFCF), of which business investment is a part. 

As the chart below demonstrates, since Q1 2008, UK GFCF has considerably outpaced France and Italy and pretty much matched Germany (with some boost post the 2016 vote and a small divergence post Covid/the end of the transition period). There is no evidence in this chart of a Brexit effect at all.  

“The UK is lagging behind the rest of the G7 in terms of trade recovery after the pandemic,” writes the FT:

Summing up the effects on trade in which imports from the EU have fallen while exports have not risen, Adam Posen, head of the Peterson Institute of International Economics, says “everybody else sees a recovery in trade 

Well, first the FT’s claim that exports to the EU have not risen since the end of the transition period is demonstrably false. Here is a chart using ONS data. As you can see, following the Covid fallout and the end of the transition period, UK exports to the EU have risen. 

But what about their wider claim that UK export growth is lagging the rest of the G7 & imports from the EU falling?

Below I present a chart comparing UK exports with exports from Germany, France and Italy indexed to Q1 2000. Note the UK broadly matched Germany until 2012 — when UK exports then flat-lined until 2016 — but they caught up after the Brexit vote undoubtedly in part because of the fall in the pound. 

So the FT claim of lower export growth post the Brexit referendum is incorrect. However, there is clearly a lacklustre recovery post Covid which needs more examination.

So what did imports do over this period?

Below is a chart comparing imports into the UK, Germany and France since the beginning of 2019. As you can see, imports into the UK have been running considerably below the levels into Germany & France over this period.

So what we appear to be seeing is a reduction in UK export growth AND import growth, or what economists/trade experts call trade intensity.

Below is a chart comparing UK trade as a % of GDP (exports+imports) with France & Germany since 2008.

As you can see there has definitely been a divergence since 2020 (although not markedly different to other shifts which later reverted including the period 2013-2015). Might Brexit be one of the causes for this lowering in trade intensity? Maybe. Leaving the EU single market and customs union changes trade patterns just as they changed when the UK joined the EEC and again when the SM was created in 1992.

For example, before the advent of the SM the UK/EU trade balance was broadly neutral. Following the introduction of the SM, the UK moved into an ever increasing trade deficit, with the goods trade deficit reaching around £100b a year.

As you can see above, in 2019 there was a change in the trend, with the EU trade surplus declining. This trend continued in 2020 & 2021 as shown below.

So, although the time period is short, it would appear from the data that whilst the FT is wrong to say that UK exports to the EU have not grown since the end of the transition period and wrong to say there was no export bounce from the fall in the pound, they are right to say that UK export growth & import growth since 2020 has been running below their peers with the greater change being lower imports into the UK from the EU.

Is this a cause for concern for the UK economy? Is it a function of British economic collapse? A collapse in consumer demand?

Well  let’s look at what has been happening to UK industrial production versus Germany and France. Although it is hardly booming and has not returned to pre-Covid levels, the UK is outperforming Germany and France and as this increased production is not being exported, this suggests UK producers are gaining market share in the UK (pushing out imports).

So, UK/EU trade patterns do seem to have changed. But is this necessarily a bad thing as the FT suggests?

Well what matters is what these changes mean on balance for UK GDP. And as this chart from Economist Julian Jessop illustrates, there is no clear impact from Brexit at all on GDP.

Nor does there appear to be any negative effect from Brexit on UK GDP growth forecasts.  Over the 3 year period 2021-23, the IMF forecasts the UK to be the fastest growing economy in the G7 as they also do for the four year period 2024-27 (see below).

To summarise my investigation into the FT’s “serious analysis” on “The deafening silence over Brexit’s economic fallout”, the FT:

  • Failed to put the fall in the pound in 2016 into context (both to the long term trade weighted average and expert analysis of the pound’s overvaluation in 2015).
  • Was wrong to say the fall in the pound didn’t boost UK exports.
  • Whilst correct that UK inflation had been higher than the EU, failed to explain that this had been the case since the Great Financial Crash in 2008 and not a result of Brexit.
  • Failed to put higher UK inflation into context — both that it had been running at the same rate as the G7 and that it was still below the Central Bank target at a time when their aim was to create higher inflation.
  • Was wrong to say Brexit has led to higher food inflation in the UK (EU food inflation has been more than 5 times higher than the UK & G7 4 times higher).
  • Failed to put UK food inflation into context (UK food prices are already amongst the lowest in Europe as are the current price rises).
  • Selectively presented UK business investment data to imply a Brexit effect on the long term trend rate and failed to put the figures into context versus EU peers.
  • Was wrong to say UK exports to the EU have not grown since the end of the Brexit transition period.
  • Was right to say UK export & import growth since the end of the transition period has been lower than our EU peers, but wrong to say this has negatively impacted GDP.
  • Was wrong to say Brexit has caused a reduction in UK long term GDP forecasts (e.g. the IMF predicts the UK to be the fastest growing G7 economy in the period 2021-2023 AND 2024-2027).

I am not saying that all is rosy in the UK economic garden, far from it, but this article demonstrates perfectly the FT’s bias and willingness to (mis)present data in any way possible to create and push an anti-Brexit narrative. 

The FT describes themselves as unbiased purveyors of the truth in a fake news world. I repeat the question I asked in my previous article: does that sound like the FT to you?

Source link

Close