Atradius economists have analysed trade relationships between the UK and the rest of the EU (EU-27) within the new Brexit report, published three years on from the Brexit referendum. While the future trade relationship is still not clear, some developments within UK-EU trade flows are already evident.
UK-EU export trends
UK exports to the EU have grown by 6.8%, the highest growth rate since early 2012. Simultaneously, trade from the EU to the UK has flattened at just 0.9%. This is driven by the depreciation of the pound against the euro since June 2016, reducing purchasing power in the UK and boosting the competitiveness of UK exports, further supported by robust demand in European markets. By comparison, growth in intra-EU-27 exports has increased by 6.8%.
This trend, since early 2017, is a reversal of the relationship observed in the post-global crisis period when EU exports to the UK grew at a faster pace than vice versa. From 2011 to 2015, EU exports grew, on average, 6.4% per year compared to a growth of 1.2% in UK-EU exports. However, following the 2015 UK election which paved the way for the in/out referendum, the tides began to turn. The subsequent change in trade developments correlates to the depreciation of the pound which has made UK products more competitive in European markets with European products becoming relatively more expensive for Britons, thereby losing competiveness. This is reinforced by GDP growth developments with the falling pound weakening consumer purchasing power and weighing on GDP and reducing import demand.
EU vulnerabilities to Brexit
Atradius has identified Ireland, the Netherlands and Belgium as the most vulnerable economies in terms of export dependence on the UK, while Germany and France export the most to the UK in terms of volume. Looking to the sectors, the transport equipment sector is the most vulnerable European industry with exports to the UK accounting for 11.3% of the total sector value added. Food products follows as the second most exposed sector, followed by textiles.
Atradius warns these recent trends are not expected to continue so strongly going forward as exchange rate effects fade. However, lack of progress in the negotiations could renew downward pressure on the pound, continuing to reduce export opportunities to the UK and boost exports.
Stuart Ramsden, Head of Commercial for Atradius, commented: “The trade relationship between the UK and the EU-27 is significant with 48% of total UK exports directed towards the EU and 16% reciprocated. With such large volumes, any barriers to trade that might arise – for example in the forms of tariffs or longer wait times at the border – are likely to have a negative impact but the full extent of any change will only become clear when the UK finally leaves the EU. In the meantime, we have already seen changes in bilateral trade flows and the weaker British pound and its contribution through lower consumer purchasing power on UK GDP growth has depressed import growth from nearly all other EU countries.
“In the short term, the expected stabilisation in exchange rates will reduce the boost for UK exports but also ease the strain on EU exporters to the UK. In the medium term, export performance into and out of the UK depends greatly on the future trade relationship established. Should negotiations further stall or even break down, renewed downward pressure on the pound would continue and possibly exacerbate these trade effects, increasing the challenges for EU-27 exporters.
“Our role as trade credit insurers is to support businesses in managing the risks of navigating the changing economic landscape so that they can reap the rewards of international trade whatever the future may hold.”