Brexit and COVID-19 in the Midlands

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Will Rossiter, Associate Professor of Regional Policy & Development at Nottingham Trent University, reflects on the impact of Brexit and the pandemic in the Midlands over the last two years.

Reflecting on Brexit and the pandemic

A year-on from the end of the transition period covering the UK’s exit from the EU and roughly two years from the start of the Covid-19 pandemic is a timely point at which to reflect on the economic and wider significance of these experiences for the Midlands. This opinion piece will try and take stock of the experience of the last 2 years, drawing together many of the recurring themes that have featured in the regular City-REDI/Midlands Engine Economic Monitors. In so doing, it will consider some of the implications for the future development of the Midlands economy.

Main challenges

One of the main challenges in reviewing this tumultuous period is the difficulty in attributing causality for the phenomena that we have witnessed to Brexit and/or Covid. Brexit was always likely to cause a degree of economic dislocation that would require adaptation from both businesses and consumers – though views varied as to the likely scale and significance of these impacts. Similarly, a global pandemic and the associated public health response cannot occur without economic consequences – a direct result of the necessary policy response – but also a function of behavioural change in the population at large. The juxtaposition of Brexit and Covid makes it difficult to attribute causality and precisely apportion degrees of responsibility for specific economic outcomes to these contingencies, but there is a very real sense in which the co-evolution of Brexit and the Covid-19 pandemic have exacerbated the scale and significance of the challenges faced by the businesses, people and communities of the Midlands. Nowhere is this more evident than in relation to trade and supply chains.

Trade and supply chains

Arguably, some of the first economic impacts of the pandemic to affect the UK early in 2020 were felt through international supply chains as lockdowns and other restrictions in China disrupted manufacturing operations and the onward supplies of goods and materials to the West. Looking back, we can see this as the first inkling of a story that would be ever-present in the business news pages over the next two years. That story concerns both the complexity of globalised supply chains and their vulnerability to disruption in times like these.

Some of the first economic impacts of the pandemic to affect the UK early in 2020 were felt through international supply chains.

From a consumer perspective, supply chain issues first came to prominence in March 2020 with the well documented ‘run on toilet rolls’ coupled with shortages of eggs and flour on supermarket shelves as a result of a lockdown home-baking boom. As time passed shortages spread, a boom in bicycle sales stimulated by lockdown fitness drives was followed swiftly by a bicycle drought as retailers exhausted their stock. Stock which could not be replenished in short order from the Chinese and Taiwanese manufacturing concerns on whom the sector depends for the supply of both finished product and components.

From a business perspective, the challenges presented by supply chain problems were various. Midlands Engine Monitors over the last two years have documented business experience of supply problems in relation to finished products (e.g. bicycles and PPE); materials such as wood, steel, cardboard and polypropylene; and specialist components such as semiconductors used widely in manufacturing. These supply chain problems have disrupted production while also contributing to rising input cost pressures on businesses.

Problems in the supply of materials and products have been further exacerbated by dislocation in international logistics operations. Costs of international shipments (container prices) have risen dramatically over the course of the pandemic. The pandemic did not happen everywhere at once. Successive waves of infection reached different countries at different times. Containers gravitated towards the more open economies, meaning that when other countries reopened, containers were not available when required to facilitate a resumption of international goods movements. And then there is Brexit.

Supply problems in relation to finished products materials have been documented such as wood, steel, cardboard and polypropylene.
Specific impacts of Brexit

It is particularly challenging, in the context of pandemic related disruption to international trade, to be categorical about the specific impacts of Brexit on trade volumes. Nevertheless, an analysis published by the Office for Budget Responsibility (OBR) (October 2021) suggests an overall decline in UK goods trade of around 15% is associated with the implementation of the Trade and Cooperation Agreement (TCA) with the EU at the end of the transition period and the UK’s departure from the EU customs union and single market. It is noteworthy that this is prior to the full implementation of the TCA scheduled for later in 2022. Brexit has clearly resulted in greater friction at the borders. Business insights reported in the Midlands Engine Monitors suggest that the burden of these new, largely administrative trade barriers, has fallen disproportionately on smaller export active businesses that have been less able to bear the resulting costs. Costs of phytosanitary and health checks have made small scale exports of food products direct to consumers in the EU all but impossible. Full implementation of the TCA later this year, including customs checks on inbound goods and certification of origin requirements for exports to the EU, represents a significant downside risk as we move into 2022.

Taken together, these diverse experiences of supply problems demonstrate the complex interplay between policy responses to pandemics (lockdowns) and behavioural responses to pandemics. These experiences have also raised questions about the continuing viability of some of the Just-in-Time (JIT) approaches to production and supply that have come to dominate key manufacturing sectors for the Midlands such as automotive and aerospace. If manufacturers can no longer rely on the certainty of supply necessary to make JIT production viable, they will need to consider alternative means to re-establish the resilience of their supply chains. None of these means will be cost-free. Possible responses include a return to holding more ‘buffer-stock’ in inventory as a means of enhancing supply chain resilience. More fundamentally, some may reconsider the balance between on and offshore manufacturing and procurement within their supply chains. We can hope that any resultant ‘re-shoring’ will create opportunities for the Midlands, but the cost advantages associated with manufacturing for mass markets in places like South Asia and China remain.

Work, employment and labour supply

Turning to work, employment and questions of labour supply, the story of the last two years is complex and nuanced. On one level, we can say that the unemployment impact of the pandemic has been less pronounced than many commentators were anticipating early in 2020. This is in no small part due to the single most important and successful (if imperfect) economic measure implemented by the Government in response to the pandemic – furlough – the Coronavirus Job Retention Scheme. Indeed, at the time of writing, ONS report that UK pay-rolled employees stand at 29.5 million. This is more than 400,000 higher than the level in February 2020. Nationally the unemployment rate has dropped to 4.1% (ONS, January 2022).

The picture is more nuanced if we look beneath these headline numbers. Economic inactivity rates have risen over the course of the pandemic. This is a reversal of the long-term trend since the early 1970s. In recent months these increases have been driven by those in the 50-64 age group (ONS, January 2022). There has also been a marked decline in self-employment (not reflected in the pay-rolled employee figures).

Retail, hospitality and tourism have fared far worse than those less affected by the combination of lockdown type restrictions and associated behavioural change on the part of consumers.

The picture is also more complex if we take a sectoral perspective. In general, economic sectors characterised by social consumption such as retail, hospitality and tourism have fared far worse than those less affected by the combination of lockdown type restrictions and associated behavioural change on the part of consumers. Figures collated by the Centre for Retail Research for 2020-21 suggest that more than a quarter of a million jobs and over 25,000 stores have been lost in retail since the start of the pandemic. Here we may be seeing evidence of one of the longer-term legacies of behavioural change associated with the pandemic. In October 2021, the OBR suggested that while retail sales had recovered to pre-pandemic levels, retail footfall remained around 20% below that seen in 2019. This may not be unrelated to:

(1) the rise in prevalence of home or hybrid working that has seen many office-based workers staying away from city centre-based workplaces, and

(2) a marked acceleration of the shift to online sales.

The shift to homeworking has been one of the most widely noted behavioural changes associated with the pandemic. It is important to remember that while this has become the norm for many office workers, it has never been practicable for process or production workers who can only work on a factory floor and, indeed, for the many service sector workers whose activities must be performed face to face. Nevertheless, research on employer and employee attitudes to future homeworking suggests that there is growing evidence that the shift to home or hybrid working is one behavioural change that is likely to stick (ONS, June 2021).

It is hard to overstate the potential significance of this behavioural change for many aspects of economic life. Fewer people commuting to city workplaces has obvious consequences for demand for city centre retail. It also has major implications for transport planning and service provision. Also affected is the nature of and demand for commercial property in cities. This in turn may have consequences for the property portfolios of investors – not the least of these being our pension funds.

A further labour market issue that has featured with greater prominence in recent editions of the Midlands Economic Monitor are the labour supply problems now being widely reported by many businesses.  This is a general problem, but also one that is particularly evident in sectors that were reliant on EU migrant labour prior to Brexit. ONS reported that the number of job vacancies from October to December 2021 rose to a new record of 1,247,000, an increase of 462,000 from the pre-coronavirus pandemic level. Similarly, the ratio of vacancies to every 100 employee jobs reached a record high of 4.1 at the end of 2021 (ONS, January 2022). Labour shortages in particular sectors can quickly become more general economic (and social) problems as was seen in autumn 2021. Notable examples include HGV drivers, meat processing workers and seasonal farm workers. Unfilled vacancies in health and social care are a longstanding problem. ONS reports of the largest sectoral rise in vacancy numbers for the final quarter of 2021 being in health and social work may add to these concerns.

Energy costs, input prices and inflation

The big story of late 2021 has been rising inflation, falling real wages and prospects of a cost-of-living crisis for 2022. But in truth, this is a story that has been building for some time. Business surveys by organisations including the BCC, CBI, FSB and Make UK have been consistent throughout 2021 in reporting rising input costs as a major concern. It can be no great surprise, therefore, that these costs have now fed through into the prices paid by consumers as evidenced by the highest level of CPI (at 5.4% in December 2021) since the early 1990s and the time of the First Gulf War. What we have in common with that period is a pronounced energy price spike that is expected to see CPI inflation exceed 6% by around Easter 2022.

By historic standards, these levels of inflation are not extreme. CPI inflation reached 20% in the early 1980s and a peak of some 27% in 1975. Average earnings were rising at the end of 2021 (4.2% was reported by ONS for the period to November), but not enough to allow wages to keep pace with inflation. What makes this decline in real wages such a concern now is that:

(1) it comes after an unprecedented decade of stagnant real wage growth in the UK. Indeed, this is the third time over the last decade when real wages have fallen.

(2) It comes after the economic privations of a pandemic which we know has already disproportionately borne on those with the least.

The Joseph Rowntree Foundation reports (January 2022) bleak prospects for poverty levels in general but particularly for the many families in receipt of benefits and or those in low paid or precarious work.

This blog is written by Will Rossiter, Associate Professor of Regional Policy & Development, Nottingham Trent University.

The views expressed in this analysis post are those of the authors and not necessarily those of City-REDI / WMREDI or the University of Birmingham.

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