TextileFuture offers you in this feature different angles and sources in order to find out what the economic effects are on the UK and the world, based upon the latest OECD Survey on the UK economy, then we offer some blogs to illuminate the same problems and finally we draw your attention to a publication of Textile Intelligence suggesting that the UK might profit of a Brexit at least in textile aspects
This Overview is extracted from the OECD 2017 Economic Survey of United Kingdom (October 2017). The Survey is published on the responsibility of the Economic and Development Review Committee (EDRC) of the OECD, which is charged with the examination of the economic situation of member countries. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.
United Kingdom – Maintain close ties with EU to meet challenges of Brexit
The U.K. economy has weakened in the aftermath of the decision to leave the European Union. Maintaining close ties with the EU and implementing policies to boost productivity will be crucial for maintaining future living standards, according to a new report from the OECD.
The latest OECD Economic Survey of the United Kingdom details developments since the June 2016 vote to leave the EU, highlighting growing uncertainties and a number of risks. This includes the hit on households’ purchasing power from higher inflation, declining savings rates, and a fall in net migration. It lays out a range of policy options for meeting the challenges posed by Brexit and building a stronger and more inclusive U.K. economy going forward.
“The United Kingdom is facing challenging times, with Brexit creating serious economic uncertainties that could stifle growth for years to come,” Mr Gurría said. “Maintaining the closest economic relationship with the European Union will be absolutely key, for the trade of goods and services as well as the movement of labour. Macroeconomic and fiscal policy can and should continue being used to support the economy, both during and after the exit negotiations. Future prosperity will depend on new reforms to improve job quality, boost labour productivity and ensure that the benefits are shared by all.”
The Survey says that sustained economic progress will hinge on a successful outcome to negotiations with the EU and those still to come with other countries. It recommends efforts to ensure high value chain integration for network industries and high levels of access for services sectors to overseas markets.
Monetary stimulus has left “fiscal space” for greater use of productivity-enhancing investment initiatives. The Survey suggests that the Government consider swift deployment of such measures in the event that the low-growth trap continues. It also notes scope for a tax and spending review, to identify additional fiscal initiatives, including the potential for higher National Income contributions for the self-employed and indexation of state pensions on average earnings only.
The Survey says that addressing the regional productivity divide – between high-productivity areas like London and Southern England and lower-productivity regions in the North – can be a key channel for fostering long-term growth and sharing prosperity across the country. As part of the industrial strategy, locally and regionally focused investment in transportation and housing would boost the productivity-enhancing effects of agglomerations. Further decentralisation should include increased local authority oversight over property taxes.
Increasing support for innovation to help businesses adopt modern technologies, enhance business-university collaboration and adapt technical education to local business needs will raise productivity in regions, as will taking additional steps to ensure sufficient teacher training and incentives to reduce teacher shortages in disadvantaged regions, the Survey said.
With employment at high levels, labour and social policy should be directed at improving job quality as well as the productivity of low-skilled workers. This can include the introduction of tighter criteria to restrict self-employment to truly independent entrepreneurs, enhance job security rights for workers on zero-hours contracts, as well as individually targeted programmes to improve lifelong learning opportunities, the Survey said.
The Survey, presented in London by OECD Secretary-General Ángel Gurría and U.K. Chancellor of the Exchequer Philip Hammond, identifies priority areas for future action, including new productivity-enhancing fiscal initiatives and comprehensive policy reforms to boost the economic performance of lagging regions nationwide.
We provide now the most important findings and recommendations in the form of self-explanatory tables:
Where to get the best bang for the buck in the United Kingdom? Industrial strategy, investment and lagging regions
This feature is based on oecdecoscope and guest authors Rafal Kierzenkowski, Head of UK Desk, Peter Gal, Economist, Productivity Workstream, and Gabor Fulop, Analyst at the UK Desk, OECD Economics Department, and was released on November 6, 2017
The United Kingdom has large regional disparities in productivity which contribute to differences in living standards across the country, while its less productive regions also hold back overall economic performance (OECD, 2017). High levels of productivity in London are widespread across nearly all sectors, especially among knowledge intensive services such as finance and insurance and information and communication technologies (ICT) (Figure 1).
To narrow these gaps in productivity, the government is preparing a modern industrial strategy to boost labour productivity across the whole country (HM Government, 2017). The strategy has a broad sectoral focus, going beyond manufacturing industries, and aims to improve the local and regional business environment so that both successful businesses and potential new ones can thrive. Devising the optimal strategy raises the question of the optimal allocation of scarce resources in meeting these targets. Our recent study (Kierzenkowksi et al. 2017) aims to contribute to the policy choices linked to the strategy and finds that the catch up of firms with the national best performers in services sectors can give large productivity benefits for most lagging regions, in particular knowledge intensive services such as ICT and business services, but also wholesale and retail trade.
Our study also identifies the sectoral strengths of each region and shows that while each region has productivity leaders, the concentration of such firms is the highest in the south of England, surrounding London, especially in ICT and business services. In turn, differences in the representation of the most productive firms in regions are strongly related to differences in regional productivity.
Given low levels of investments in the UK economy and the role new capital goods can play in adopting the latest technologies, our study quantifies the amount of regional and sectoral productivity increases that can be achieved by raising capital intensity. The greatest potential to increase productivity in most regions is by raising the capital intensity of services sectors, which are more responsive to capital intensity increases, in particular in many lagging regions (e.g. northern parts of England, Northern Ireland) (Figure 2).
A strong focus on services would also be consistent with the position of UK sectors in global value chains (Criscuolo and Timmis, 2017). However, more granular analysis regarding the type of investment used to raise capital intensity suggests that R&D spending could be effective in raising the productivity of the manufacturing sector in some regions (Figure 3).
Of course, there are several complementary factors to capital intensity that are likely to play a key role in boosting productivity of lagging regions but which can be harder to take into account in a systematic, quantitative manner. Key among them is the availability of skills and their matching to jobs, especially given that regional job-to-job mobility is likely to be held back by a low price elasticity of housing supply. In addition, the ecosystem of companies including the role of infrastructure as well as the density of consumers and suppliers are also likely to play a crucial role.
Mitigating the negative economic impact of Brexit
Guest authors of this feature are Rafal Kierzendowski, Mark Baker, Pierre Beynet and Gabor Fulop, UK Desk, OECD Economics Department
Ahead of the referendum on Brexit, the OECD had been anticipating a significant decrease in economic growth if the decision to leave the EU were taken (Kierzenkowski et al., 2016). As the UK economy has started to slow down, OECD simulations remain remarkably valid so far (Figure 1).
British growth was ahead of G7 economies one year ago, but has now fallen behind as other advanced economies have continued to recover (Figure 2). The recent OECD economic survey on the UK (OECD, 2017) analyses which channels Brexit prospects are currently hurting the economy and what could be done to mitigate this impact.
The sterling’s depreciation has been a major drag on growth. It has pushed consumer prices up and hurt household consumption by reducing purchasing power. As real incomes have fallen, households have for a while supported their consumption by reducing their savings. However, the saving ratio increased in the second quarter and consumer credit growth may have peaked. Car registrations are subdued since April.
The sterling’s depreciation has also cut corporate margins of domestic producers, reducing the ability of non-exporting firms to finance investment. In addition, business investment growth has weakened as economic policy uncertainty is high. Weak demand should also negatively weigh on investment of domestically-oriented firms: this is the second-highest risk cited by around half of businesses, with the effects of Brexit being the top risk for nearly 60% of them (Deloitte, 2017).
The depreciation of the pound should support export-oriented firms, but this might not be sufficient to offset the negative factors mentioned above. History indicates that British exports have had a low responsiveness to exchange rate movements and the UK’s export performance has been in fact falling over the last two decades (Figure 3). This could be due to increased participation in global value chains, implying a high import content in exports, reducing scope for exporters to win market share following currency depreciation. Moreover, exporters who rely less on imports tend to increase their margins following a depreciation, preventing them from gaining market shares.
Immigration has enhanced living standards by expanding the labour market and by having a positive impact on labour productivity. Following the EU membership referendum in mid-2016, there has been an important fall in net migration, mainly of EU citizens, explained by increased emigration and reduced immigration (Figure 4). Declines in net migration could tighten the labour market if labour supply falls faster than labour demand. It will significantly reduce growth eventually.
In this context, the recent OECD economic survey recommends that the UK authorities secure the closest possible economic relationship with the European Union in its future trading arrangement. Rapidly concluding negotiations to guarantee the rights of EU citizens is a priority to sustain labour supply and ensure further progress in living standards. The United Kingdom should adopt simple criteria to deal with EU citizens living and/or working in the United Kingdom, which would minimise administrative burdens and avoid that some categories of EU citizens fall into the cracks, such as cross-border workers. The government should also identify in advance productivity-enhancing fiscal initiatives on investment that can be implemented swiftly should growth weaken significantly ahead of Brexit. A detailed evaluation of polices to offset the possible loss of European structural funds to poorer UK regions will also be necessary to avoid exacerbating existing regional economic disparities.
Last but not least, we allow you the evaluations and revelations of Textiles Intelligence:
Brexit could benefit the UK textile and clothing industry
Brexit, the exit of the UK from the EU, could benefit the UK textile and clothing industry, according to a report in the latest issue of Global Apparel Markets from the business information company Textiles Intelligence.
One consequence of the UK’s decision to exit the EU has been a fall in the value of sterling and this has made UK textile and clothing exports more competitive in terms of price. At the same time, many UK retailers are considering sourcing more of their requirements from UK suppliers as the fall in the value of sterling has made imports more expensive.
Meanwhile, many foreign suppliers are diverting the focus of their export efforts to other markets as the UK market has become less profitable.
These trends are set to continue in the run up to Brexit — which is set for March 29, 2019 — and beyond — as long as sterling remains low.
The UK textile and clothing industry could also benefit if — in the absence of a free trade agreement — customs duties are imposed on imports originating in the EU and other “near shore” supplying countries such as Turkey. Customs duties would make imports from these countries more expensive and, as a result, such imports would pose less competition for UK produced goods.
At the same time, exiting the EU would provide opportunities for the UK to negotiate its own trade deals — which it is not permitted to do as an EU member. This could mean better access for the UK textile and clothing industry to export markets in China, Japan and the USA, where UK manufactured products command a premium.
It is thought that a tariff-free or duty-free arrangement between the UK and the USA, for instance, could lead to a 30 % surge in UK exports to the USA over a five-year period. Furthermore, this could benefit US consumers as it could lower the prices of quality UK goods in the US market by an estimated 15-25 %.
However, the extent to which the UK textile and clothing industry will be able to expand in response to these opportunities will be limited by the fact that there are no longer any large volume garment manufacturing plants in the UK.
Also, there are concerns about the future availability of talent and skilled operatives. Many of the industry’s skilled employees have come from other EU countries in recent years — especially those in Eastern Europe — and access to such resources could be curtailed if inward migration is restricted.
That said, as manufacturing opportunities in the UK textile and clothing industry open up, there is a chance that perceptions of employment opportunities in the industry will improve and this could help the industry to attract new, young, home grown talent.
One of the biggest concerns of the UK textile and clothing industry, however, is future access to the single European market. As much as 45% of UK textile imports and 25% of UK clothing imports come from other EU countries, and large proportions of these imports are materials used in the manufacture of textiles and clothing in the UK for subsequent export. If tariffs were imposed on imports of these materials, their cost would increase and this would force UK textile and clothing companies to increase their prices in the domestic market and lose market share.
In fact, if the UK were to fall back on World Trade Organization (WTO) rules, then the average tariff on imports of textile products coming into the UK would be between 10% and 15%. And — given that there has already been a 20% increase in costs as a result of the depreciation of sterling against the US dollar since the UK’s decision to exit the EU was made — imported materials could become 35% more expensive when WTO tariffs are factored in.
An increase in the cost of imported materials would also force UK textile and clothing companies to increase their export prices and this could have a huge effect on sales of their products abroad.
As much as 74 % of UK textile and clothing exports go to other EU countries and it is feared that much of this trade will be lost unless a free trade agreement can be negotiated.
Furthermore, if UK textile and clothing products were to become subject to higher tariffs when they are imported into EU countries, then more products would be made in the EU rather than in the UK, more products would be warehoused in the EU rather than in the UK, and more products would be shipped from the EU rather than from the UK — all at the expense of jobs and economic activity. More offices would be established in the EU and thus more jobs created in the EU at the expense of those in the UK.
In the meantime, until there is further clarity regarding the terms of the UK’s exit from the EU, the uncertainty surrounding Brexit while negotiations are ongoing will continue to cripple business investment decisions and harm business and consumer confidence.
This report, “Talking strategy: impact of Brexit on the UK fashion and textile industry—threats and opportunities”, was published by the global business information company Textiles Intelligence in Issue No 37 of Global Apparel Markets.
“Talking strategy: impact of Brexit on the UK fashion and textile industry—threats and opportunities” costs GBP145 (UK), EUR 265 (Europe, Middle East or Africa) or USD 350 (Americas or Asia Pacific).
A transitional arrangement can ease Brexit impact on fashion
While the entire industry awaits the final Brexit agenda to decide their future course of action, recent developments show the UK government is pushing for a two-year transitional deal to help a smooth change. Prime Minister Theresa May outlined plans to strike a deal that would effectively delay implementation of any new trade agreement between the UK and the EU until 2021. At the end of October, Brexit Secretary David Davis told a committee of MPs that he expected the outline of this transitional period to be agreed within the first three months of 2018.
This move welcome across fashion and retail fraternity as everyone in unison feels an early agreement on transitional arrangements would be essential to allow companies time to prepare. Helen Dickinson, Chief Executive, British Retail Consortium (BRC), points out he would allow time to adapt new customs controls to avoid disruption and to agree a final deal that avoids new tariffs. According to her, a period of implementation is vital to offer certainty for businesses and allow them to prepare.
Nigel Lugg, Chairman, UK Fashion and Textile Association (UKFT), during a recent Association of Suppliers to the British Clothing Industry’s autumn conference in Peterborough, said the government negotiation is key to the future of the industry. There are huge benefits the industry could reap post-Brexit but the complexities of the divorce settlement run deeper than anyone can even imagine. Julia Redman, Head of buying for kidswear, menswear and home at value fashion retailer M&Co, feels no one knows the exact outcome of the treaty. It’s like stepping into the unknown. The only thing that can be achieved is to plan well for the future.
The BRC is calling for a system that ensures goods can continue to be imported without delays, disruption or additional costs. This would require significant investment in capacity, staff and IT systems – all of which would take time to sort out.
Mike Flanagan, CEO, Clothesource, explains 92 % of clothing exports and 31 % of imports have to travel through European customs posts. At borders outside the EU, lorries turn up and wait for a couple of days. Lugg said one of their key demands is to remain in the European Customs Union. The speed and simplicity of sending goods to Europe has been a huge benefit. On the French side of the Channel Tunnel, there is space for just six (articulated) lorries at the border. The industry can’t afford to let customs delays happen.
Draft FTA before end of time
In early October, Trade Secretary Liam Fox said the government expected to have draft FTAs on the table long before it reached the end of Brexit transitional period. This is good news for the fashion and textiles industry. There is a need to conclude meaningful trade deals with the US, Japan, Australia, New Zealand, and so on, as the opportunities are unbelievable. FTAs could provide a huge boost to the sector’s export drive, and the growth of UK manufacturing.
The US is the UK’s largest export market outside the EU but duties and tariffs, the ATA Carnet – an international customs document that permits the temporary tax-free and duty-free export and import of goods for up to one year – and other non-tariff barriers make many UK companies reluctant exporters to the US. An FTA would simplify the process, allowing brands to enter the US easily. The US has shown substantial interest in UK-made products. The buzz is EU is likely to offer an interim arrangement but limit it to 21 months. Whether it extends to 21 or 24 months, securing such a deal must be a priority for the prime minister.
Opportunities & challenges
A two-year transitional Brexit arrangement would give fashion businesses more time to adapt to new customs controls. Allow EU nationals in the UK more time to settle their migration status. Give more time to establish new administrative systems for customs. Potentially give the government time to negotiate draft FTAs. Give ministers time to agree on a final deal that avoids new tariffs. However, it could also keep the value of sterling low for longer, ultimately leading to retail price rises.