Why Brexit Britain is isolated, vulnerable and on fumes

Long queues have been seen at petrol stations across the UK (Image: Daily Mirror/Andy Stenning)

LONDON (Bloomberg) – Lines of cars snake from petrol stations. Fights break out among angry motorists trying to get fuel. Grocery staples are out of stock on store shelves. A charity warns that doubling heating bills will force a million households to rely on extra blankets to stay warm.

This was supposed to be the year the UK broke free of the European Union and forged ahead as a buccaneering free trader, delivering the benefits of a new, confident “Global Britain” to workers and companies at home. Instead, that picture of Brexit utopia is looking more like a dystopia.

As Prime Minister Boris Johnson’s Conservative Party gathers at its annual conference this week, the promise of self-determination has given way to a foreboding sense of economic isolation.

A confluence of crises has forced the government to deploy soldiers to drive fuel trucks, energy suppliers to go out of business and panicked households to try and fill cupboards — all while Covid-19 is still rife.

The pound, meanwhile, has been trading like an emerging-market currency rather than from a steady Group of Seven country. The governor of the Bank of England, Andrew Bailey, even quipped whether a plague of locusts would be next to beset the UK. He now has the task of figuring out how to raise interest rates to subdue inflation without choking the economy.

The Confederation of British Industry, the biggest business lobby, is urging Johnson to set up an emergency taskforce to deal with the supply shortages and cost of living. The country faces “a perfect inflationary storm” that could plunge the economy into a recession next year, according to Gavekal Research. Retail executives predict food prices will rise at an annual pace of 5 percent by the end of the year.

“The recovery is in a very fragile state,” said Karan Bilimoria, the CBI’s president. “The nightmare scenario is a ‘winter of discontent’,” he said, evoking the period in the late 1970s when strikes and shortages led to the downfall of the Labour government. “The basics not being available is what we’ve got to try and prevent.”

The immediate challenges facing the UK stem from the loss of a vital pool of labour after its transition out of the EU ended on January 1. A dearth of truckers is raising fears not just about toys or turkeys for Christmas, but whether people will have enough fuel and food this winter.

The government said late on September 25 it plans to issue short-term visas for truck drivers and poultry workers, though businesses say it won’t come close to filling the gap. Johnson said on Sunday the UK also won’t go back to relying on immigration to solve the shortage. There are also deficits of people across industries from agriculture and meat to hospitality.

The National Pig Association estimates 150 000 pigs are stuck on farms because of a shortage of gas to stun them and not enough people to process them.

Bloomberg Economics forecasts economic growth will slow to 1,3 percent   in the fourth quarter from 1,6 percent   in the previous three months. Although that still leaves the economy on course to expand 6,3 percent for the whole year, inflation is set to end the year above 3 percent   and stay there until mid-2022.

The root of the UK’s outsized struggles are broader and come down to its dependence on trade, an asset before the pandemic that allowed for lean supply lines and championed by supporters of  Brexit. That reliance now magnifies the damage from leaving the EU and Covid-19 disruption.

Exports and imports as a share of gross domestic product peaked at 63 percent in 2019 before slumping to 55 percent   last year, according to World Bank figures. By comparison, the ratio was 46 percent   for Australia, 35 percent for Japan and 24 percent for the US.

John Shirley, a UK freight forwarder, feels the supply shocks rattling the world — the shipping delays, the skyrocketing costs, the general fog of uncertainty blanketing the global economy. But he has faced another constant headache on top of the pandemic over the past nine months. “All this extra paperwork,” he says, “all this extra hassle.”

That was the predictable reality of Brexit. Hauling a truckload of refrigerators to the UK from Italy, for example, costs nearly 25 percent   more than before the split from the EU. Starting in January, trucks arriving at UK borders will face new customs controls, and food products will be subject to onerous documentary rules beginning next July.

But what British households are also waking up to is that among the imports the UK relies on is natural gas for heating and electricity generation.

Domestic gas prices have more than quadrupled this year, following a similar move for the benchmark European price in the Netherlands. A colder-and longer-than-average winter left Europe’s stockpiles depleted while Russia has been exporting less to the continent.

Storage in the UK itself is already scarce, and in the first full winter of Brexit, that reliance on imports will be tested. The situation could ease if a contentious new pipeline, Nord Stream 2, is opened to connect Russia to Germany via the Baltic Sea. But a last round of political wrangling still stands in the way. The best hope might be for the weather to be a few degrees warmer than average.

“The UK is not always fully aware how reliant it is on European storage,” said Marco Alvera, head of Italian energy infrastructure company Snam. “If it gets very cold — and it is not a Brexit-related thing — even within Europe you will see countries saying, ‘I have the gas inside my borders, I am going to pass an urgent safety measure that no one can export for the next two weeks.’”

Brexit campaigners led by Johnson acknowledge that adjusting to a divorce after more than four decades of marriage with the EU was always going to take time. And nobody, of course, could have predicted a pandemic would be raging just at the point of departure.

The narrative in the first half of 2021 was how the UK’s world-beating vaccination program allowed the government to unshackle the economy from Covid-19 restrictions in July. Since then, though, Britain’s vulnerabilities have become clearer, especially when it comes to maintaining supply chains. — Bloomberg.