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Early year collapse in the UK’s trading volumes with the EU is not a harbinger of things to come

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UK goods trading with the EU fell substantially in January. UK goods exports and imports to the EU plunged by £5.6bn (41%) and £6.6bn (29%) respectively, according to the Office for National Statistics (ONS), in the most precipitous monthly decline since records began in 1997.

The decline was sharpest in exports to:
Germany                                                                                                            £1.1bn
Ireland                                                                                                               £1.0bn
France                                                                                                                £707m
Netherlands                                                                                                        £653m
The largest falls in imports from:
Germany                                                                                                            £1.6bn
Netherlands                                                                                                        £1.0bn
Belgium                                                                                                              £960m
France                                                                                                                £544m

In comparison, the UK’s goods trading with non-EU nations held up better. Exports to non-EU nations rose by £497m, principally driven by a 75% increase in monthly trading with Switzerland to almost £1.1bn, supported by the UK and Switzerland trade agreement which came into effect at the turn of the year. But imports from non-EU nations fell by £2.4bn, including around £2bn from China and the US, as the pandemic weighed on international trade flows. Overall, the UK’s global trading was £10bn lower in January, composed of £5.3bn and £8.9bn in reduced exports and imports respectively

Border disruption following the end of the EU exit transition period was undoubtedly a primary cause for the downturn in UK trading with the EU. But these headline numbers mask a more nuanced picture, and the January data is unlikely to be a harbinger of a long-term trajectory for future trends in imports and exports. January’s precipitous monthly fall in EU trading was likely also due to preparatory stockpiling in November and December in anticipation of border disruption, the impact of the UK’s third national lockdown in early January, pandemic-induced global supply chain disruptions, and reduced demand for imports. Most economies shrank in January due to renewed lockdowns worldwide weighing on international trade flows. In the UK, monthly GDP fell by -2.9%, according to ONS data. While significant, the monthly reduction is far more robust than the -4.9% consensus forecast. It was supported by solid performance in the construction and health sectors and reflected the UK economy’s improved resilience. Last Thursday the Bank of England left rates unchanged at 0.1%.

January’s fluctuation in trade can also be attributed, in part, to a new reporting system implemented by the ONS, which only measures goods for export to the EU five days after clearing customs. Capital Economics notes that this will have cut off the final five days of exports in the January figures, reflecting 16% of the month, precisely when the disruption was easing. The equivalent February data from the ONS, which will be published in mid-April, will likely show a rebound in UK’s exports and imports trading with the EU as stockpiled inventories built up before the end of the transition period will have been used up.

Indeed, faster data indicators point to a re-acceleration in EU imports and exports goods trading from late January. For example, the proportion of UK businesses that reported export and import challenges plateaued in mid-February 2021, according to the ONS business insights and impact on the UK economy data series. Heavy goods vehicle (HGV) traffic data, a loose indicator of trade activity, was 10% to 15% lower around Dover over the second half of January than a year earlier, but appears to have recovered in February, according to Highways England data. This supports the view that the bulk of the disruption to EU–UK goods trade volumes will be temporary. The Office for Budget Responsibility (OBR) has quantified the economic cost of this near-term EU–UK trade disruption, forecasting a reduced GDP by 0.5% in Q1, with exports harder hit than imports. However, this disruption will dissipate as both sides grow accustomed to new trading arrangements. Most UK businesses cite additional paperwork as the main challenge related to importing and exporting to the EU, followed by changes in transportation costs.

The Road Haulage Association (RHA) takes a different view. The trade association says that while the picture is slowly improving, border disruptions are a consequence of a lack of customs agents and inadequate preparation for post-transition changes. Last week, Cabinet Minister Michael Gove announced a raft of delays for different post-Brexit import controls in response to “businesses who have made a strong case that they need more time to prepare”. The RHA said the new delays will “lessen the headache for many international hauliers”. One bright note for UK exporters is the receding proportion of businesses which cite reduced demand for their products and services, which more than halved from 21.9% for the week ending 24 January, to 9.8% in the latest published survey related to the week ending 21 February. It is an important indicator that tracks the degree to which EU companies are structurally squeezing UK companies out of EU supply chains.

Overall, the OBR predicts that UK trading with the EU is forecast to recover quickly over 2021 and 2022 with imports supported by pent-up household consumption and business investment subsidies offered in the Spring Budget. In the medium term, imports will rise modestly, and exports will fall slightly, aligned to pre-existing long-term trends and exacerbated by the UK’s lower share of the EU export market after Brexit. Exports will also continue to be under strain from EU nations battling recessionary pressures. UK GDP is expected to grow by 4% in 2021 and regain its pre-pandemic level in Q2 2022, according to the OBR. Unemployment will peak at 6.5% at the end of 2021.

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