The UK is not the only country in Europe – or in the Western world – to be affected by a harsh cost of living crisis. However, those other countries are not trying to deal with the jolt that Brexit has delivered to their economies.
At the end of December 2020, the EU-UK Trade and Cooperation Agreement (TCA) was signed, which was then applied provisionally from 1 January 2021 and brought fully into effect in May 2021. At a time when global supply chains were being significantly disrupted by the Covid-19 pandemic, businesses in the UK were also having to contend with what the reality of a divorce from the EU would look like, after years of uncertainty.
The concerns were many, with the logistics sector a key focus, as fears of huge lorry queues amassing at border points started to arise. Nearly two years on, the picture is exacerbated by the Russia-Ukraine conflict, which has in turn contributed to a rise in energy prices and, ultimately, a more widespread cost of living crisis, with inflation reaching 40-year highs.
Think tank UK in a Changing Europe (UKICE) published a report in mid-2022 on the status of post-Brexit imports, supply chains and the effect on consumer prices. The report’s main takeaway is that food prices increased by 6% between December 2019 and September 2021 because of Brexit. While the food sector was the only one to experience such a sharp surge in prices, other industries showed signs of disruption, especially after the TCA came into effect.
“The reason for these price increases is straightforward: additional barriers at the border, such as checks, increased waiting times and additional paperwork, are costly for producers,” the report said.
“Firms could change the partner countries from which they were importing, or purchase domestically, but assuming they were operating in the most efficient manner initially, any change is going to incur extra costs. These costs may then be passed on to consumers, increasing consumer prices.”
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The Brexit burden of higher transport costs
The increased cost of goods transport, and in particular of imports, is one of the main triggers behind the pressure being felt by consumers.
In a webinar before the TCA came into effect, consultancy Michael Page interviewed a panel of logistics and goods transport experts where the burden of increased costs due to Brexit was already being felt.
John Lucy, who then was head of international transport at the UK Road Haulage Association and is now a director at Liverpool Freeport, said during the webinar: “UK export freight costs have been traditionally low. This has since turned on its head, with the price for EU export loads from the UK now in uncharted territory.
“The number of empty trips from European hauliers is increasing, because they are not prepared to pick up return loads. The upshot is a reduction in supply [and a] subsequent increase in freight rates from the UK to the EU, which in turn has increased import freight costs since EU hauliers are pricing it up as a round trip.”
Speaking to Investment Monitor recently, Lucy said that transport costs start piling up at the top of the supply chain and then have to be passed down to the consumer as capacity has decreased due to consolidation.
“The cost of moving goods from A to B has been increasing ever since Brexit came into effect,” he says. “Covid-19 caused many lorry drivers to go back to their countries of origin in Europe and never return, which in turn has created a capacity crisis as companies started consolidating. Everybody is affected in some way, shape or form, from businesses to consumers.”
UK consumers feel the pinch
The UKICE report – which was produced by researchers from the London School of Economics’ Centre for Economic Performance with funding from the think tank – highlighted the increase in UK-EU trade barriers leading to a 6% increase in food prices in the UK.
This came about because the TCA brought in significant new measures in the UK trade market, including more comprehensive customs checks; rules of origin requirements; the need to prove regulatory compliance in each jurisdiction separately; sanitary and phytosanitary measures for trade in animals and plants; and limitations on the freedom of movement for business travel. All of this translates into additional costs for UK businesses trading goods with the EU.
In the post-referendum and pre-TCA period, the economic effects of Brexit began to materialise, according to the UKICE report. “Following the implementation of the TCA, there is a clear and sizeable drop in imports from the EU [to the UK],” said the report. “This is evident when comparing the UK’s imports from the EU with those from non-EU countries, or when comparing the UK’s position relative to the EU with other countries, such as the US’s imports from the EU.”
Investment Monitor’s data team has independently verified UK import behaviour from EU versus non-EU countries following the Brexit referendum and the signing of the TCA and has also found that imports from EU countries have dropped as a result and have not recovered to pre-pandemic levels.
The UKICE report shows that some products such as fats, oils and waxes experienced a sizeable decrease in trade volumes with EU countries when compared with those of non-EU countries in January 2021. Other products, such as minerals, experienced minimal deviation in imports from the EU versus non-EU countries.
Investment Monitor’s data team has analysed the Office for National Statistics' consumer price inflation data from July 2018 to July 2022 and identified the ten items that have seen the largest price increase.
Leather sofas saw the largest percentage change in price (98%) since the TCA was signed, closely followed by cooking apples at 93% and medium-density fibreboard (better known as MDF) at 76.2%.
The team has also used UN Comtrade data to provide a picture of UK trade in 2022 by breaking it down into imports and exports with the EU and imports and exports with the rest of the world.
As the UK is a net importer, import volumes were significantly higher compared with exports. However, it is on the import side that the difference between volumes from EU versus non-EU countries is more.
The chart below shows that imports from the rest of the world were at their highest at £43bn ($47.29bn) in March 2022, while those from EU countries peaked at £37bn in the same period.
The impact of the falling pound
Pressure on the costs of UK imports and eventually on consumer goods has also recently come from a falling pound.
“Economically, a weakening British pound makes it more expensive for UK companies to import goods and services from abroad," says Investment Monitor chief economist Glenn Barklie. "These can be final goods or services and/or components that are used to make other goods.
“Regardless, the result is that a weakening currency will likely see prices increase. An increase in price levels, given the current difficult times consumers are facing, will likely see demand drop. This in turn will place further burdens on the UK’s economic growth prospects.”
The behaviour of the pound is interconnected with that of import and consumer prices in the UK, and while the currency has recovered from its record low of 1.0799 against the US dollar at the end of September 2022, the future is still highly uncertain.
To prevent the country entering a period of stagflation – where there is a recession while inflation is still high – the Bank of England may have to further raise interest rates. While the aim of that is to curb inflation, it will also have a significant impact on households’ mortgage repayments, thus making the cost of living crisis worse.
“A falling pound makes it more expensive to buy goods from abroad," says Lucy. "The UK is a net importer, which means pressure will pile on the supply chain and will drip all the way down to the consumer end.
“The future of import and consumer prices in the UK depends on many factors, from the war in Ukraine to the reaction that the pound will have to the government’s decisions in the coming weeks and months.”
Many macroeconomic and geopolitical factors will play a pivotal role in the cost of living crisis in the UK, but it seems that Brexit is unlikely to have a positive effect on any of them.