In the immediate aftermath of the referendum on the UK’s membership of the European Union on the 23rd of June 2016, the pound fell sharply against other major currencies. At the time of writing, £1 will buy €1.19 or 1.25 US dollars, down 8.5% and 14.7% respectively $1.47 and €1.30 on the eve of the referendum.
It has been claimed by various sources that a fall in the pound, whilst obviously bad news for importers and holidaymakers, will prove a boon for exporters. Previously I had looked at export data from HMRC’s Trade Statistics Unit to analyze the potential risks to the Northern Ireland economy from a hard border, especially with regards to agricultural exports.
The latest data available at that point was until the end of June 2016. However now Q3 2016 data is available, giving an early read on the impact on exports following the devaluation of sterling and subsequent shenanigans regarding the debate on the UK’s future relationship with the EU.
The good news is that the devaluation of the pound has indeed led to a sharp increase in exports in the third quarter of 2016 when compared to the equivalent period in 2015. However, the majority of this increase is accounted for by an increase in exports to the EU.
Exports were up £4.52 billion from Q3 2015 to Q3 2016, which represented an increase of 6.7%. Of this total increase, exports to the EU accounted for £3.36 billion, with the remainder of £1.17 billion going to the rest of the world. The decision by the UK to leave the EU has appeared to have led to a marked increase in British exports, albeit three quarters of which have been exports to the EU itself.
Some parts of the UK have been the beneficiary of the Brexit boom in EU trade more than others. The chart below shows year-on-year growth in exports to the EU, split by constituent nation of the UK (and overall). Scottish exports to the EU have slightly more than doubled in the year to Q3 2016, up £1.6 billion from the previous year. The vast majority of this (£1.4 billion) has been exports of petroleum related products, most of which has been exports to Germany and The Netherlands.
Wales has also seen a marked increase in exports to the EU (£729m, or 60%). The export to France and Germany of transportation equipment has been the driver behind this increase, accounting for £668m of the increase. The increase in exports in Northern Ireland is almost entirely attributable to manufacturing, with 88% of the overall increase in exports from Q3 2015 to 2016 of £191m due to exports of manufactured goods or transportation equipment.
Despite the fact that the pound has fallen more sharply against the US dollar than the euro, export growth to the rest of the world has been more anaemic. The chart below shows the year on year growth by quarter in non-EU exports for each part of the UK. Exports to non-EU countries increased by 3.3% from Q3 2015 to 2016, compared with an increase of 10.4% to the EU.
It has long been the aim of many policymakers to re-orientate the British economy towards manufacturing, and early indiations are that a devaluation of the pound is indeed helping to boost manufacturing exports as many had hoped. However, it appears that the largest potential market for a rejuvenated British manufacturing industry is the European Union. Any barriers, tariffs or otherwise, between British manufacturing exporters and their customers inside the EU will make it very difficult to nurture these nascent industrial sectors.
The period following the referendum has seen a sharp drop in the value of the pound, driven in the main by market jitters about the uncertainty of the UK’s relationship with the EU. It is, in effect, a devaluation caused by the incompetence and uselessness of the British government rather than any action taken by, say, the Bank of England.
It is almost as if Theresa May’s government have developed an entirely new form of unconventional monetary policy. By signalling to the markets that they clearly have no clue what they are doing, for example the strange fixation on jam, a mainly riddle-based approach to future UK-EU relations (“Brexit means Brexit” etc.), the appointment of Alexander Boris de Pfeffel Johnson as Foreign Secretary and so forth, they have caused the pound to fall and exports to rise.
The British government does seem to be going out of its way to appear genuinely unhinged prior to beginning negotiations with the EU. It is perhaps a crumb of comfort to imagine that the UK government’s Brexit strategy is an exercise of game theory, and what we are seeing is merely a high stakes version of Split or Steal.
In any case, the paradox cannot be sustained indefinitely. The UK is enjoying an increase in exports to the EU, driven in the main by a fall in the pound caused by a fear that it will not be able to freely trade with the EU in the future. This is a cake that cannot continue to be both had and eaten forever.