Despite the approaching 29 March 2019, the date on which the United Kingdom will officially leave the EU, negotiations on the future of the relationship between Europe and the United Kingdom have stalled. And while future business relationships remain to be determined, Atradius has published the ones that are current effects of Brexit on trade flows between the UK and the rest of the EU: the weakness of the Pound and the slowdown in GDP growth weigh on demand, while the increase in competitiveness linked to the weak Pound (thanks to the lack of progress in the negotiations) has supported the growth of the British exports to the EU, reaching the highest level since 2012.
However, as exchange rate effects fade, analysts do not expect this trend to continue. In this scenario, Ireland, the Netherlands and Belgium appear to be the economies most exposed in terms of dependence on exports to the United Kingdom, while Germany, followed by France, are the largest exporters in terms of volume. Looking at the different sectors, the transport industry is the most vulnerable at European level since exports to the UK represent 11,3% of the value added of the sector.
Food products are the second most exposed sector, followed by textiles. Not forgetting that more than 10% of value added in the transport sector in over half of the 27 EU markets depends on exports to the UK. In turn, Irish exports to the United Kingdom represent 44,2% of the added value of the manufacturing sector and 40,3% of the added value of the food sector.
Trade relations between the UK and the other 27 EU countries are of significant importance: UK exports of goods to the EU represent 48% of the total, while 16% of exports from the EU, excluding intra-EU trade , is intended for the United Kingdom. Given these significant volumes, any barriers to trade, whether in the form of tariffs or longer border waits, are likely to have a negative impact on trade.
The full extent of these effects will be clearer when the UK officially leaves the common market in March 2019 (with the possibility of a transition period until December 2020). The UK will continue to be a full member of the EU until its exit date and there are still no tariffs on trade with Europe; therefore, beyond the persistent uncertainty, nothing has changed yet. The real impacts on trade will probably begin to be evident in the medium/long term as a result of the effective change in relationships and the need to adjust supply chains. However, some signals can already be observed in terms of bilateral trade flows, in line with exchange rate developments.
Data from the International Monetary Fund in terms of gross exports show a solid recovery of UK exports to the EU-27 starting from the first months of 2017 (+6,8%) at the highest growth rate since February 2012 At the same time, EU exports to the UK have dwindled since the last months of 2016. A trend that represents a turnaround compared to what was observed in the period following the global crisis: between 2011 and 2015 exports from the EU to the UK had grown (+6,4%) faster than those from the UK to the EU (+1,2%).
These trade developments are in line with exchange rate developments. From mid-2015, the British currency began to depreciate against the Euro and to date it has lost 14% compared to June 2016, i.e. before the Brexit referendum. Over the course of 2017 this has meant that UK products have become more competitive on European markets, while EU products have become relatively more expensive for Britons and have lost competitiveness on the UK market.
This picture is confirmed by the trend in GDP growth: the weaker Pound reduced the purchasing power of British consumers, causing a contraction in the demand for goods and services from abroad. At the same time, EU demand strengthened on the back of the broad-based economic recovery.
If we take a look at the exports of individual EU countries, at the end of 2015 the growth of exports to the United Kingdom began to show a downward trend. In the case of Germany, Spain and Belgium, the contraction mainly concerns the chemical and automotive sectors, the main export sectors to the United Kingdom. While for most European markets, growth in the agro-food and metals sectors remained solid in the UK market.
In this context, Ireland is a clear exception: in 2017 exports to the UK grew by 8% despite the weakness of the pound and solid demand from the EU, while Irish trade flows to other countries members increased by only 1,4%. Growth was mainly supported by the chemical sector, whose supply chain between the UK and Ireland is closely integrated and, as such, this sector is not considered among the most vulnerable in terms of added value to the economy. However, the chemical sector accounts for the largest share of Ireland's gross exports to the UK and the 26,5% growth recorded in 2017 has a strong influence on the total export figure. The solid performance of this sector should continue thanks to continuous investments and innovations.
It is therefore clear that the weakness of the Pound and its negative influence, in terms of reduction in the purchasing power of consumers, on GDP growth has led to a slowdown in export growth in almost all other EU markets. At the same time, the increase in the competitiveness of British exports represented the characterizing element of 2017: however, it is not clear for how much longer the issues related to exchange rates will continue to have a significant impact.
Atradius expects export opportunities to the UK to remain stable over the course of 2018-19, albeit with a slight improvement over last year mainly due to the easing depreciation of the Pound. In this period, the British currency should remain essentially stable, favoring a slowdown in UK exports to the EU. However, the effects of imported inflation will ease, helping to improve the export prospects of the remaining member states, even though relatively weak GDP growth could limit market opportunities.
In the medium term, the trend of trade flows with the United Kingdom will largely depend on the definition of future relations with the EU. Analysts expect that only a draft formal agreement will be available on the official release date, while more detailed agreements will be worked on during the transition period, again on the assumption that this period is confirmed.
Hence, the risks for the next few years seem to be oriented towards the downside. At the moment, movements in exchange rates and in GDP are reflected in trade flows between the EU and the UK: the pound has fluctuated sharply in the aftermath of the referendum and remains exposed to news flows on the Brexit side. Therefore, a stalemate or even a breakdown in negotiations could have negative effects on the Pound, increasing the challenges for EU-27 exporters.
