Companies and investors have just 30 working days left to prepare for a No Deal Brexit

Companies across the UK and EU27 are suddenly realising there are now just 30 working days until the UK will likely abandon its 45-year trading relationship with the EU, and start to trade on WTO terms.

If this happens, every supply chain involving a movement between the UK and EU27 will change. And all those supply chains governed by EU deals outside the EU will also change. A large number of industries are already being impacted:

  • Scotch whisky exports to Korea worth £71m ($90m) a year, risk a 20% tariff after 29 March if the EU’s Free Trade Agreement is replaced by WTO rules. It is now too late to export by boat, causing some exporters to use expensive air freight to beat the deadline. But capacity is already almost full.
  • Many banks, insurance companies and asset managers have already moved staff from London into the EU27.  They cannot risk waking up on 30 March to find they can no longer serve customers from London, because they have lost the essential EU “passport”.
  • “CE Marks” issued in the UK will no longer be valid in the EU27 after No Deal  – making it difficult to sell any goods that need safety, health or environmental approval.
  • And last week, BASF’s UK MD, Richard Carter, told Ready for Brexit that for the world’s largest chemical company: “The thought of having to re-register with a UK REACH equivalent if there is no deal and if there is no recognition equivalence is a huge concern”.

THE UK REMAINS ON COURSE TO LEAVE THE EU WITH NO DEAL ON 29 MARCH
But surely, you say, “this cannot happen”.  After all the UK’s main business organisation, the Confederation of British Industry, has already warned that No Deal would create “a situation of national emergency“.

But the leading Tory Brexiters don’t believe this.  Their 111 votes, combined with the 10 votes from the Democratic Unionist Party, meant premier May’s Withdrawal Agreement was defeated by 230 votes last month.  It would have provided a Transition Agreement until the end of 2020.

However, their votes then swung behind her to defeat the motion of No Confidence in the government, which would have led to a general election.  Why did they do this, you might ask, given they had just voted against her key policy?

The answer is that the Brexiters have a completely different view of the Brexit negotiations, as I noted in The pH Report last year.

They simply don’t accept the CBI argument. Instead they believe the EU27 will be the main losers from No Deal as they argue the financial outcome will be:

“Plus £651 billion ($875bn) for the UK versus minus £507bn for the EU: it could not be more open and shut who least wants a breakdown.“

In their view, the best way to force the EU27 to offer a better deal is simply to leave on 29 March.

They also, as I noted here in December, will be quite happy to see the end of key industries such as autos, as the leading Brexiter economist Prof Patrick Minford told the Treasury Committee in October:

You are going to have to run it down … in the same way we ran down the coal industry and steel industry. These things happen.”

The alternatives to No Deal are now also extremely limited.  The Caroline Spelman/Jack Dromey resolution to block No Deal was passed last month by 8 votes. But it was only a resolution and has no legal force.

Of course, Parliament might change its mind and decide to vote for May’s Agreement.  Or the government might revoke its Article 50 notification before the UK leaves on 29 March. But both would split the Tory and Labour Parties and are unlikely to happen.

The government could also decide to hold a second referendum. But again, this would split both parties and is unlikely.

It is therefore hard to disagree with the independent Institute for Government, who concluded: “Britain’s politicians are unwilling to put jobs and the economy above party politics.

The only other option is for MPs to effectively take over the government by demanding that it stops No Deal.  It is not clear how this could happen, but presumably they could pass legislation demanding that May asks Brussels for a lengthy extension to Article 50.

But such a move by Parliament has never happened before. It would need key Ministers such as Chancellor Philip Hammond to vote against their own government. It would also need support from enough Opposition MPs to overcome Brexiter resistance.

It would also risk a constitutional crisis, as it would replace an elected government.  And in terms of practicalities, it would presumably also mean that the UK would take part in the EU Parliament elections, as it would still be a full EU member in May. The whole process would take the UK into completely uncharted water.

THERE ARE JUST 30 WORKING DAYS LEFT TO PREPARE FOR A NO DEAL BREXIT

Anticipating this risk led me to co-found Ready for Brexit last year, to help businesses navigate the challenges and opportunities created by Brexit.

It is effectively the one-stop shop requested recently by the CBI.  It provides curated links to all the areas where you may need to urgently prepare for Brexit.

The video explains what WTO rules could mean for your business. Please watch it now, and then decide if you need to start planning today for whatever may happen on 29 March.

The BoE’s pre-emptive strike is not without risk

The Financial Times has kindly printed my letter below, arguing that it seems the default answer to almost any economic question has now become “more stimulus” from the central bank.

After 15 years of subprime lending and then quantitative easing, last week’s warning from the Bank of England suggests there are fewer and fewer economic questions to which the default answer is not “more stimulus”.

But it is still disappointing to find the Financial Times supporting this reflex reaction when considering the risks associated with Brexit next month (“Bank of England must grapple with the risks of a no-deal Brexit”, February 6). Nobody would dispute that the bank has a critical role in terms of ensuring financial stability through the Brexit transition. As the FT says, the “potential outcomes are discrete and the impacts vary widely”.

But the bank has already fulfilled this role by publishing its November assessment of the no-deal risks for government and parliament to consider. There is therefore no justification for the bank to pre-emptively impose its views by deciding to keeping interest rates artificially low.

The political risks associated with such an intervention would be large, particularly if the bank’s assessment or its proposed solution proves wrong. And there is also the risk of unintended consequences.

The history of stimulus does, after all, suggest that the only certain outcome of lower interest rates would be a further rise in today’s already sky-high level of asset prices.

Paul Hodges
The pH Report

Flexible working is key to reversing today’s collapse in fertility rates

Women in most parts of the world are not having enough children to replace our population. This is one of the great issues of our time, but is hardly ever discussed.

Yet the issue is very topical, with Chinese births falling to a 60-year low last year.  Only 15.23 million babies were born, the lowest level since 1961 when the population was 654 million, less than half today’s 1.4bn. Soon, deaths will start to overtake births – as they have already in Japan.

It used to be thought that China was a special case due to its “one child policy”, pictured above. But this law was relaxed in 2015.  And although births did rise in 2016, as some couples took advantage of the new law, forecasts that births could reach 23m in 2018 have proved completely wrong.

FERTILITY RATES HAVE COLLAPSED AROUND THE WORLD

China is not alone, however, in seeing its fertility rates collapse, as the chart of the world’s 10 largest economies confirms.  It shows the number of babies/woman being born since 1950, based on UN Population Division data:

  • Asia.  China’s rate has fallen from 6 to 1.6; India from 5.9 to 2.2; Japan from 3 to 1.5
  • Americas.  Brazil has fallen from 6.1 to 1.7; Canada from 3.6 to 1.6; USA from 3.3 to 1.9
  • Europe. The UK has fallen from 2.2 to 1.9; Italy from 2.4 to 1.5; France from 2.8 to 2; Germany from 2.1 to 1.5

So only India is now above the replacement level of 2.1 babies/woman. And probably this will change within the next 5 – 10 years as latest national data shows that 12 states are already below replacement levels, whilst urban areas are at just 1.8 babies/woman.

Of course, part of the reason is increasing life expectancy – women don’t  need to have a baby every year to ensure someone is there to look after them when they grow old.

This was critical even 200 years ago, when life expectancy was just 30 years. But after the discovery of smallpox vaccination, Rising life expectancy enabled the Industrial Revolution to occur and today, life expectancy has more than doubled.

In turn, of course, today’s ageing populations are creating major headwinds for growth, as I discussed in Economic policy needs to focus on impact of the 100-year life.  This is particularly critical in wealthier countries, given that the West faces a demographic deficit as population ages.,

But another key – and related – issue is the collapse in fertility rates itself.

POLICIES HAVE TO CHANGE IF FERTILITY RATES ARE TO RECOVER 

It is easy to forget today that it is only within the last 100 years that men began to accept that women could play a full role in society.  It was exactly a century ago, for example, that resistance to the idea of women voting began to crumble.

The catalyst for change was World War 1. With men having gone to fight, women had to be allowed to leave the home and go to work.  And when the men came back, they felt unable to stop the move to allow women to vote.  But this didn’t stop men enforcing marriage bars until the 1960s.

These meant that Western women would routinely lose their job when they got married, on the grounds that “it was the man’s job to earn the income, whilst the woman stayed at home with the children“.  And, of course, women’s lives and ambitions were still restricted in a vast number of ways.

THE COST OF HAVING CHILDREN IS TOO HIGH FOR MANY WOMEN

Today, the collapse of fertility rates should be seen as a critical issue for society.  Of course, not every woman wants to have children. But for those that do, there are at least 2 types of cost that currently discourage them.

One “cost” is simply the high cost of living.  In China, for example, Caixin notes that

“High parenting costs are severely inhibiting. For example, in a typical Chinese middle-class family, the average annual cost of raising a child is about 30,000 yuan ($4,400).”

This is higher than China’s average per capita disposable income at just $4165 in 2018, according to government data.

But there is another “cost” that women have to face if they want to have children.  This is that job conditions are still based on the pre-1960 pattern. As a recent survey by the UK parenting site, Mumsnet, reports:

“Three-quarters of parents found flexible working — including part-time hours, job shares and reduced hours during school holidays — more important to them than perks such as health insurance and gym membership, and more than half of them valued it over getting a pay rise.”

Tech companies seem particularly bad in this area, as one mother wrote recently about working at Facebook:

“I love my job, but I love my baby even more. When I told Facebook I wanted to work from home part-time, HR was firm: You can’t work from home, you can’t work part-time, and you can’t take extra unpaid leave…..Zuckerberg said he was sorry I was leaving.

Most companies still operate a version of the same out-of-date policies. It’s time that they, and governments, began to wake up to the consequences. Common sense tells us that everyone would benefit from introducing more flexible working arrangements. And it is also the only way that we will get back to replacing our population, before it is too late.

No Deal Brexit remains UK law unless MPs reverse their previous votes

That couldn’t happen” are probably the 3 most dangerous words in the English language. They mean “I don’t want to think about something that might be painful“. So if you hear MPs saying a “No Deal Brexit can’t happen“, ignore them. They are wrong.

‘NO DEAL’ BREXIT IS THE LAW OF THE LAND
The issue is simple, yet seemingly too painful for most MPs and commentators to accept.

The EU Withdrawal Act (2018) became law on 26 June last year.  It set 29 March 2019 as Brexit Day.  It allowed for a Transition Agreement if a Withdrawal Agreement was agreed. Without a Withdrawal Agreement, the UK simply leaves with No Deal.

The law is the law, and the Act is primary legislation, which means it has since been incorporated in a whole range of laws and regulations as part of the UK’s exit preparations.  It cannot, therefore, be overturned by statements that claim “There is no majority for No Deal”.

In fact, during the Committee stage, the House of Commons voted 320-114 in Committee Stage against staying in the Customs Union.  It also voted 319-23 against a second referendum. And last week, MPs voted 432-202 against the proposed Withdrawal Agreement.

So if MPs say “No Deal can’t happen”, they are wrong. They have already voted for ‘No Deal’.

CHANGING PRIMARY LEGISLATION IS VERY HARD

Of course, MPs could still change their minds. But there are now less than 70 days till Brexit.  And they would also have to agree this with the other EU 27 countries.  These represent nearly 450 million people versus the UK’s 66 million.

Equally important is that the UK has been heading in this direction since negotiations started:

Since then, MPs have voted for the Withdrawal Act; against remaining in a Customs Union; against a new referendum; and against the Withdrawal Agreement. They have also voted for invoking Article 50 and for setting 29 March 2019 (by 498-114 votes) as Brexit Day.

So time is running out for them to change their minds.

THE ALTERNATIVES TO ‘NO DEAL’ ARE CURRENTLY WISHFUL THINKING

The politics of Brexit also make it unlikely that the government will change its mind, or be forced to change its mind:

  • Theresa May knows very well that any move to “soften” Brexit by joining a Customs Union would split her Conservative Party down the middle. And any Tory MP who voted for a softer Brexit knows they would likely be deselected as a candidate and lose their job
  • Labour leader Jeremy Corbyn voted to leave the EU in the 1975 referendum, and against the Maastricht/Lisbon Treaties. Many traditional Labour voters are also strongly pro-Leave. So any Labour MP voting against the Party line also faces the risk of deselection

It is therefore hard to see why simply extending Article 50 beyond 29 March would change anything.

And extending would enormously complicate the European elections in May. At the moment, the UK is not taking part in these, as it is leaving on 29 March. But if it isn’t leaving after all, there is little time left to prepare to vote on 23 May

Of course, the EU27 might agree an extension if the UK decided to hold a second referendum, as long as the vote was held before the new Parliament starts work on 2 July. But they would likely first want to know the question on the ballot paper.

Would the government ask if the voters approved of May’s Withdrawal Agreement? Would it instead ask if they wanted to stay in the EU? Or would it simply ask if they wanted to leave with No Deal?

Any of these questions are possible.  But deciding between them could be very divisive in itself.  And a referendum campaign could be even more divisive.  Plus, its outcome would be very uncertain if voters worried that democracy was being undermined by a refusal to accept the first result.

“A week is a long time in politics” as former premier Harold Wilson famously noted.  So it is possible that Sir Keir Starmer’s call yesterday for a new Labour approach might succeed.  Equally, MPs might decide to support the Nick Boles and/or the Dame Caroline Spelman/Jack Dromey motions next week.

But this would only be the start of a quite complex process, which might well end with a General Election being called – and all the while, the clock is ticking.

So after the government’s defeat on Tuesday, UK businesses and those that trade with the UK must urgently begin to plan on the basis that a No Deal Brexit on 29 March is now UK law. 

Please consider joining Ready for Brexit today (the advisory service I co-founded in June). It is effectively the one-stop shop requested by the CBI, and provides curated links to all the areas where businesses may need to prepare for Brexit.

CEOs need new business models amid downturn

Many indicators are now pointing towards a global downturn in the economy, along with paradigm shifts in demand patterns. CEOs need to urgently build resilient business models to survive and prosper in this New Normal world, as I discuss in my 2019 Outlook and video interview with ICIS.

Global recession is the obvious risk as we start 2019.  Last year’s hopes for a synchronised global recovery now seem just a distant memory.  Instead, they have been replaced by fears of a synchronised global downturn.

Capacity Utilisation in the global chemical industry is the best leading indicator that we have for the global economy.  And latest data from the American Chemistry Council confirms that the downtrend is now well-established.  It is also clear that key areas for chemical demand and the global economy such as autos, housing and electronics moved into decline during the second half of 2018.

In addition, however, it seems likely that we are now seeing a generational change take place in demand patterns:

  • From the 1980s onwards, the demand surge caused by the arrival of the BabyBoomers into the Wealth Creating 25 – 54 cohort led to the rise of globalisation, as companies focused on creating new sources of supply to meet their needs
  • At the same time the collapse of fertility rates after 1970 led to the emergence of 2-income families for the first time, as women often chose to go back into the workforce after childbirth. In turn, this helped to create a new and highly profitable mid-market for “affordable luxury”
  • Today, however, only the youngest Boomers are still in this critical generation for demand growth. Older Boomers have already moved into the lower-spending, lower-earning 55+ age group, whilst the younger millennials prefer to focus on “experiences” and don’t share their parents’ love of accumulating “stuff”

The real winners over the next few years will therefore be companies who not only survive the coming economic downturn, but also reposition themselves to meet these changing demand patterns.  A more service-based chemical industry is likely to emerge as a result, with sustainability and affordability replacing globalisation and affordable luxury as the key drivers for revenue and profit growth.

Please click here to download the 2019 Outlook (no registration necessary) and click here to view the video interview.

CEOs need new business models amid downturn

Many indicators are now pointing towards a global downturn in the economy, along with paradigm shifts in demand patterns. CEOs need to urgently build resilient business models to survive and prosper in this New Normal world, as I discuss in my 2019 Outlook and video interview with ICIS.

Global recession is the obvious risk as we start 2019.  Last year’s hopes for a synchronised global recovery now seem just a distant memory.  Instead, they have been replaced by fears of a synchronised global downturn.

Capacity Utilisation in the global chemical industry is the best leading indicator that we have for the global economy.  And latest data from the American Chemistry Council confirms that the downtrend is now well-established.  It is also clear that key areas for chemical demand and the global economy such as autos, housing and electronics moved into decline during the second half of 2018.

In addition, however, it seems likely that we are now seeing a generational change take place in demand patterns:

  • From the 1980s onwards, the demand surge caused by the arrival of the BabyBoomers into the Wealth Creating 25 – 54 cohort led to the rise of globalisation, as companies focused on creating new sources of supply to meet their needs
  • At the same time the collapse of fertility rates after 1970 led to the emergence of 2-income families for the first time, as women often chose to go back into the workforce after childbirth. In turn, this helped to create a new and highly profitable mid-market for “affordable luxury”
  • Today, however, only the youngest Boomers are still in this critical generation for demand growth. Older Boomers have already moved into the lower-spending, lower-earning 55+ age group, whilst the younger millennials prefer to focus on “experiences” and don’t share their parents’ love of accumulating “stuff”

The real winners over the next few years will therefore be companies who not only survive the coming economic downturn, but also reposition themselves to meet these changing demand patterns.  A more service-based chemical industry is likely to emerge as a result, with sustainability and affordability replacing globalisation and affordable luxury as the key drivers for revenue and profit growth.

Please click here to download the 2019 Outlook (no registration necessary) and click here to view the video interview.