The UK’s financial watchdog, the Office for Budget Responsibility (OBR), is predicting that a drop in UK imports and exports since Brexit is set to continue.
In its latest economic and fiscal outlook report, the OBR forecasts that UK international trade will continue to be 15% less than if the country had remained within the EU.
None of the free trade agreements signed so far or regulatory changes will have "material impact” on this forecast, the OBR’s report said.
OBR's role
According to the OBR’s own website, the watchdog’s purpose is to evaluate government performance against its fiscal targets, assess long-term sustainability of public finances and the public sector’s balance sheet.
Published on the same day as the Spring Statement or ‘mini budget’, the OBR’s latest economic and fiscal outlook had not accounted for “the full impacts of the war in Ukraine and we should be prepared for the economy and public finances to worsen – potentially significantly,” chancellor Rishi Sunak warned.
Predicting a decline in UK living standards in its latest report, the OBR said that higher inflation will erode real incomes and consumption and cut GDP growth in 2022 from 6% in its October forecast to 3.8%.
Fall in ‘trade intensity’
OBR chairman Richard Hughes said the assumption was that trade intensity would diminish after Brexit and the economy would become “less open” over time.
“Trade as a share of GDP has fallen by around 12% since 2019 which is about two-and-a-half times more than in any other G7 country,” he told BBC Radio 4’s Today programme this morning (Thursday 24 March).
“Overall UK trade volumes are down by about 15% compared to what would have happened if we had stayed in the EU, because we have made it more expensive to trade with our single largest trading partner.”
Trade lags economy
In the fourth quarter of 2021, exports and imports were respectively 13% and 12% below their 2019 averages, lagging the domestic economic recovery.
The OBR forecasts weak growth in exports and imports in the medium-term, but expects trade growth to pick up in 2022 with imports and exports rising around 9% and 7% as markets recover post pandemic.
However, the war in Ukraine could pose risks to demand in UK export markets, it says.
'Race to a Trillion'
On the government’s ‘Race to a Trillion’ plan to raise exports to £1 trillion a year by the mid-2030s, the OBR is cautious.
It said previous similar plans missed their targets “by a huge margin” and based on the trends it observed, exports are expected to fall from 27% of GDP (£620bn in nominal terms) in 2021 to 26% of GDP by 2026, (£760bn in nominal terms).
Britain lags the G7
The UK has “missed out on much of the recovery in global trade” following the pandemic due to Brexit, the OBR argues.
Exports collapsed in many countries at the start of the pandemic but recovery in UK trade has been slow relative to advanced economies. Total advanced economy goods exports already exceed pre-pandemic levels by 3% - "suggesting that Brexit may have been a factor," according to the OBR.
This fall in trade intensity could lower productivity by 4% over a 15-year period, the OBR believes.
New trade deals
None of the government’s new free trade agreements (FTAs) or other regulatory changes announced so far would be sufficient to have a material impact on the OBR’s forecasts.
This does not take account of future FTAs that the UK might conclude, or other deregulatory measures it might enact.
The government’s own estimate of the economic impact of the UK’s free trade agreement with Australia is that it would raise total UK exports by 0.4%, imports by 0.4% and GDP by 0.1% over 15 years.
IOE&IT help for UK exporters
According to the Exporter Monitor, a monthly report on export statistics from the IOE&IT and Coriolis Technologies, there were nearly 9% fewer UK businesses exporting in February 2022 compared to a year ago.
To encourage UK exporters, the IOE&IT earlier this month launched the International Trade Accelerator Voucher scheme as a £1.1 million fund to help firms large and small across the UK access IOE&IT training, consultancy and educational services.
Businesses have been able to redeem vouchers each worth £1100 against a wide range of IOE&IT services.
Marco Forgione, director general of the IOE&IT, said that some 1000 UK-based businesses have applied for the voucher, with the scheme now accepting applications to a waiting list.
“The response to this scheme shows a definite appetite among UK businesses to increase their international trade,” Forgione said.
Changing markets
In the fourth quarter of 2021, goods imports from the EU were down 18% on 2019 levels, double the 9% fall in goods exports to the EU.
By comparison there was a 10% rise in goods imports from non-EU countries, suggesting some substitution between them.
In its The Benefits of Brexit report, published on 31 January 2022, the government highlighted the opportunities presented to boost exports in pursuing trade deals with the CPTPP group and India, among others.
It also noted the growing opportunity for more digital trade, which already accounts for over £83 billion-worth of UK exports to 2022 priority countries.