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Brexit regional impact is all about exposure

Brexit regional impact is all about exposure

🕔13.Mar 2018

It’s Not-the-Budget Day. Still, there will be excitement. Chancellor Philip Hammond will make a statement – not a long one, you understand, nor one containing any new tax or spending measures, for which we’re going to have to wait until at least the autumn, writes Chris Game

Because we’re still in the tunnel of austerity, and it would be quite wrong after being stuck in it for a mere seven years to look to single sets of figures to get us out. And this is the thing about today’s Statement. It seems the various forecasts from the Office for Budget Responsibility (OBR) are significantly different from – that is, better than – those produced just last November for the real Budget.

Apparently, growth’s better, the budget deficit’s less ghastly, and even productivity’s up a decimal point. All good stuff, and, if only we weren’t a possible four years from a General Election, we could expect the odd trumpeted voting bribe.

As it is, I fear these apparent handbrake turns by the OBR will only bring yet more obloquy and ridicule on the whole economic forecasting industry by those with their own axes to grind.

I’d bet more than I would on Jury Duty in today’s National Hunt Chase at Cheltenham that it won’t take long for some MP to start drawing parallels between these changing OBR stats and the very different kinds of Brexit forecasts made by “so-called independent forecasters” using completely different models and data.

Remember just last month how junior minister Steve Baker attacked civil servants in his own Department for Exiting the EU for deliberately producing and then leaking, for policy-influencing purposes, negative economic models showing that all options other than staying in the customs union would result in lower levels of economic growth?
And how he was then forced to apologise to Parliament – after having added that civil servants have never produced a correct economic forecast. “They are always wrong, and wrong for good reasons.”

The “good reasons” proved to be that, instead of starting with the answer that the minister wanted and desperately searching for a question that might get somewhere near it, civil servants have the irritating habit of starting with the question and then modelling various feasible sets of conditions and circumstances.

In this instance, the three models found that UK economic growth would be 2% lower in 15 years’ time, even if the UK were to adhere to the rule of a single market; 5% lower if Britain negotiated a free trade deal, and 8% lower than then current forecasts if we left with no deal at all and reverted to World Trade Organisation rules. All scenarios, incidentally, assumed a new deal with the US.

What wasn’t modelled, for obvious reasons, was the Prime Minister’s then, and possibly still, preferred model of a bespoke free trade deal, allowing full advantage to be taken of all the bounteous opportunities that would open up following our exit.

I have to admit that, while Baker’s extraordinary behaviour was briefly entertaining, I personally found the whole modelling exercise, with its long time-scale, national or large-regional focus, yet seemingly precise predictions, rather underwhelming – and the more so, as I’d recently been reading some work on the same general topic, but seemingly far more interesting, more locally focussed, and West Midlands-relevant. Oh yes, and what’s more it’s on our proverbial doorstep.

I refer to just one of the projects set up under the research umbrella of ‘The UK in a Changing Europe’, based at London’s King’s College, funded by the Economic & Social Research Council – that conveniently, just last week, published one of its co-ordinating reports – Brexit: Local and Devolved Government.

All 25 commissioned projects are fascinating, but the one that concerns me here is ‘Brexit’s economic impact on the UK, its regions, cities and sectors’, an international and multi-university project but headed by Professor Raquel Ortega-Argilés at the University of Birmingham’s Business School.

At the risk of almost obscene over-simplification, probably the single most important ‘headline’ finding to date of this particular project is that the UK cities and regions that voted most strongly for Brexit are those that it turns out are most economically dependent on EU markets for their prosperity and viability.

It’s not in itself an original observation, for many have commented on the strong correlation between areas backing Brexit and those benefiting most over the years from the EU’s Structural, Investment and Social Funds. What the Birmingham-led team have added is the focus, sophistication and comprehensiveness of their trade data analysis.

Rather than attempting to second-guess the outcomes of still-unstarted Brexit negotiations, the team has assembled an extraordinarily comprehensive data set of ‘global value-chains’ – which is able, inter alia, to take account of the car manufacturing problem we constantly hear about, of goods and services criss-crossing borders multiple times before finally becoming a consumable product.

By disaggregating international trade relations in this way and down to sub-regional level – 41 regions for Germany, 30 for England, 3 for the West Midlands – it’s been possible to develop both national (first table) and regional (second table) indices of exposure to the potentially negative trade-related consequences of Brexit, and to demonstrate statistically that “UK regions are far more exposed than regions in other EU countries”. So much more exposed, indeed, that the UK and Ireland effectively require a map of their own.

The study’s results, as summarised by the authors, “demonstrate that almost all UK regions are systematically more vulnerable to Brexit than regions in any other country. Due to their longstanding trade integration with the UK, Irish regions have levels of Brexit exposure similar to those of UK regions with the lowest levels of exposure – namely, London and northern Scotland.”

The other most risk-exposed EU regions, Malta excepted, are in southern Germany, the Netherlands and Belgium, while regions in southern and eastern Europe, at least as measured by these trade linkages, are hardly affected at all.

Among English and Welsh regions, and taking the Aggregate Economy only, the West Midlands City Region is the least risk-exposed of the three West Midlands regions, in about the middle of the table, though fractionally more exposed than the metropolitan regions in the north.

Loathe as I am to admit it, though, it’s not the regional statistics in this particular study, interesting as they are, that will stay with me. It’s the impact map, and the others like it – stacked up against all those fine ministerial assurances that “they need a deal just as much as we do!” Really?

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