1

Ruth Lea

Economic Adviser

Arbuthnot Banking Group

ruthlea@arbuthnot.co.uk

07800 608 674

PERSPECTIVES

By Ruth Lea, Economic Adviser to the Arbuthnot Banking Group

Brexit update: and trade can thrive under WTO rules 16th January 2017

Introduction: Brexit developments

Prime Minster Theresa May is due to give a speech on Tuesday 17 January in which she will provide further information on the arrangements for Brexit. She is expected to say that, after Brexit, the UK will no longer be in the jurisdiction of the European Court of Justice (ECJ).1 The UK will, once again, take full control of its own laws. And she may also set out a detailed plan for a post-Brexit immigration system. If Brussels insists on freedom of movement of labour, she will, apparently, “walk away” from the Single Market. It is widely assumed that Brussels will, indeed, insist on freedom of movement of labour as it is one of the basic “four freedoms” underpinning the Single Market (goods and services, capital and labour). So, it can be assumed the UK will almost certainly leave the Single Market. Similarly, the UK will almost certainly leave the Customs Union in order to be free to negotiate its own free trade deals.2 Separately, it has been reported that the Government expects to lose its legal battle to start the Brexit process without first going through Parliament, and has drafted versions of a bill to put to Parliament after the ruling.3 Specifically, the Supreme Court is expected to rule, over the next fortnight, that the Government cannot trigger Article 50 of the Lisbon Treaty, which the PM has said she will invoke by end-March, without first obtaining Parliament’s approval. (The High Court ruled in November that the Government required Parliamentary approval, prompting the Government’s appeal to the Supreme Court in December.) At this stage of the debate it is widely assumed that Parliament, both the Commons and the Lords, will give approval for triggering Article 50. After all, the Commons recently (7 December) passed a Government amendment which stated that its timetable for triggering Article 50 should be respected by Parliament.4 MPs backed this amendment by 461 votes to 89, a huge margin of 372. Though the vote is non-binding, MPs would need to find fresh objections to the Government’s handling of Brexit if they were to oppose Article 50 enabling legislation with any degree of credibility. And it is almost certain that the Lords will not block the Government’s plans.

2

Another recent Brexit development was the release of the first report of the Commons Exiting the European Union Committee, entitled “The process for exiting the European Union and the Government’s negotiating objectives”.5-6 The report called on the Government to publish its Brexit negotiation plan as a White Paper by the middle of February, including clarity about membership of the Single Market and/or Customs Union. The report also called for an outline framework of the UK’s future trading relationship with the EU and transitional arrangements if it is not possible to reach a final agreement by the time the UK leaves the EU. The Committee also wanted the Government to commit to Parliament having a vote on the final agreement. The Government may or may not heed its requests. More specifically, the Committee suggested that, by the time that the UK exits the EU, it is essential that clarity has been provided for the following, as a bare minimum:

The institutional and financial consequences of leaving the EU including resolving all budget, pension and other liabilities and the status of EU agencies currently based in the UK.

Border arrangements between Northern Ireland and the Republic of Ireland and a recognition of Northern Ireland’s unique status with regard to the EU and confirmation of the institutional arrangements for north-south cooperation and east-west cooperation underpinning the Good Friday Agreement.

The status of UK citizens living in the EU and the status of EU citizens living in the UK.

The UK’s ongoing relationship with EU regulatory bodies and agencies, including the European Medicines Agency (EMA) and the European Banking Authority (EBA), which are based in London.

The status of ongoing police and judicial cooperation and the status of UK participation in ongoing Common Foreign and Security Policy missions.

A clear framework for UK-EU trade.

Clarity on the location of former EU powers between UK and devolved governments. Suffice to say, the debate on options for Britain’s post-Brexit relationship with the EU continues to exercise policy-makers. As we have written before, there is much to recommend a bespoke trade deal in order to minimise trade disruption for both UK exports to the EU and EU exports to the UK on Brexit. Specifically, this would, we suggest, prioritise:

A Free Trade Agreement (FTA) with the EU27 (the EU28 minus the UK) in order to retain tariff-free goods trade with the EU.7-9 Whilst EU’s trade-weighted average Common External Tariff (CET) is currently low, it is, for example, running at 10% for motor vehicles.10

An agreement on “regulatory equivalence” regimes for financial services, which would act much as “passporting” does now for EEA members.11

It is in both the UK’s and the EU27’s economic interests to agree such a deal. Concerning goods, it is arguably more in the EU27’s interests that tariff-free trade continues than in the UK’s as it runs such an enormous visible trade surplus with the UK. According to the latest figures the UK’s visible trade deficit with the EU was £89.0bn in 2015.12 The deficit with Germany alone was £31.1bn. Deficits were also sizeable with the Netherlands (£14.8bn), Belgium-Luxembourg (£9.5bn), Italy (£7.5bn), France (6.4bn), and Spain (£5.1bn).13 Turning to the financial services sector the situation is somewhat different as the UK runs a surplus with the EU. But, as the Governor of the Bank of England said recently to the Treasury Select

3

Committee (11 January), failure to secure a deal with Brussels on the City would arguably pose a bigger financial risk to the EU than to the UK on Brexit.14 He told the MPs “there are greater financial stability risks on the continent in the short term, for the transition, than there are for the UK” if there was no Brexit deal.15-16 Incidentally, he also said that Brexit no longer posed the biggest risk to domestic financial stability, as concerns were rising about the growth of consumer credit (the latest data are listed below).17 And a recent Guardian report suggested that Michel Barnier, the EU’s chief negotiator for Brexit, has shown the first signs of backing away from his hard-line, no-compromise approach after admitting he wanted a deal with Britain that will guarantee the EU27 member states continued easy access to the City after Brexit.18 According to the report, Barnier, in some unpublished minutes that hinted at unease about the costs of Brexit on continental Europe, had expressed the wish for a “special” relationship with the City of London,. “Some very specific work has to be done in this area,” he said, according to the minutes (apparently). “There will be a special/specific relationship. There will need to be work outside of the negotiation box …in order to avoid financial instability.”

The World Trade Organisation (WTO) option: trade can thrive under WTO rules

The prospects for a bespoke deal are, therefore, reasonably positive. But, if there is no bespoke agreement, then the default position would be that the UK, a member of the World Trade Organisation (WTO), would trade under WTO rules. The UK would, for example, face the EU Common External Tariff as EU exporters would face the tariffs adopted by the UK.19 There is, however, convincing evidence that trade can thrive under this regime, given favourable commercial circumstances.20 Preferential trade deals may oil the wheels of international commerce, but their importance should be kept in perspective. If the commercial circumstances are adverse, trade will not thrive, irrespective of special trade agreements. Moreover, over the last decade not only has UK exports to the non-EU grown quicker than with the EU, but UK exports to non-EU countries that have no preferential trade deals with the EU has been buoyant. Chart 1 includes the growth rates in exports in goods and services for 2005-2015 (inclusive) for Britain’s key trading partners. The data are enumerated in annex tables 1a-1c. The main conclusions are:

The red bars show the key aggregates. Total exports over this period grew by nearly 50%, whilst exports to the EU and the non-EU expanded by 25% and 75% respectively. (See annex table 1a.)

The green bars show trade with our seven largest EU partners. Whilst exports grew 45% with the Netherlands, it actually slipped by nearly 3% with Spain. Additionally, exports to Sweden grew by over 30%, exports to Poland grew by 100% and exports to Denmark were 37.5% higher (annex table 1a).

The yellow bars show the two non-EU countries that have preferential agreements with the EU, which do the most trade with the UK. They are Norway and, especially, Switzerland. Switzerland is by far the most important trading partner in this category. As we have discussed previously the EU’s suite of trade agreements does not fit especially well with the UK’s trading patterns – EFTA’s are better.21 Additionally, exports to South Korea grew by over 130%,

4

exports to Turkey grew by nearly 80% and exports to South Africa were nearly 25% higher (annex table 1b).

The blue bars show trade with non-EU countries that do not have preferential agreements with the EU. Some growth rates are spectacular in this category, as can be seen from chart 1. Granted China (PRC) is in a class of its own, with exports in 2015 3½ times as large as in 2005, and it can be expected that such a blistering rate of growth will not continue as the Chinese economy matures. But strong growth was also recorded for the US, our single biggest export market, Hong Kong, Singapore, Saudi Arabia, Residual Gulf States (Gulf States excluding Saudi Arabia), India, Australia and Canada. Exports to Japan grew by nearly 25%. In addition, exports to Russia were up nearly 90% (annex table 1c). Trade with non-EU countries, under WTO rules and in the absence of preferential trade agreements, can clearly thrive. Indeed, commercial factors and growing markets are arguably of far greater significance than trade agreements.

Chart 1 UK trade: exports of goods and services, growth 2005-2015 (%), main aggregates and

selected countries

49.5

25.2

75.9

5.5

18

34.1

10.6

28.5

45

35.7

94.1

39

79.1

254.3

73.3

56

24.4

69.2

57

62.5

45.6

-2.7

-50 0 50 100 150 200 250 300

World

EU27

Non-EU

Belgium

France

Germany

Ireland

Italy

Netherlands

Spain

Norway

Switzerland

Canada

US

China: PRC

China: HK

India

Japan

Saudi Arabia

Residual Gulf

Singapore

Australia

5

Source: ONS, UK Balance of Payments, the Pink Book, 2016 edition. See annex tables 1a-1c for the calculations.

If the UK trades with the EU under WTO rules then UK exporters will, as noted already, face the EU’s Common External Tariff. But, as William Norton argues in a recent paper for Civitas, such costs should be quite manageable and could be mitigated. His basic conclusions were:22

In the absence of any agreement with the EU, imports from the EU will raise £12.9bn for the Treasury in duties, whilst UK exporters will face £5.2bn in total in tariffs on their exports to the EU.

WTO rules on subsidies provide sufficient flexibility for the Government to implement “horizontal” programmes to mitigate the impact of tariffs. Such programmes are economy-wide measures which are not specific to any identifiable industry, and are not tied in principle or in practice to compensating for the exact cost of tariffs on exports.23

The EU share of UK exports is falling

Given the higher growth rates for trade to non-EU destinations than to EU destinations, it follows that the share of UK exports of goods and services going to the EU has fallen over the last decade and, conversely, the share going to non-EU destinations has risen.24 Moreover, the share going to non-EU destinations that do not have a preferential trade agreement with the EU has risen (see annex table 1b). As chart 2 shows, the EU share, which had been 52% in 2005, had fallen to less than 44% by 2015. Moreover, the data for the EU are distorted upwards by the Rotterdam-Antwerp Effect which refers to UK exports routed through these ports for other destinations.25 Given the more buoyant growth prospects in non-EU markets than in EU markets, the EU’s share can be expected to continue declining. Chart 2 Exports of goods and services (total): EU and non-EU (% share)

EU (share)

Non-EU (share)

40

42

44

46

48

50

52

54

56

58

60

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

EU (share) Non-EU (share)

Source: ONS, “UK Balance of Payments, The Pink Book: 2016”, July 2016.

6

The significance of growing services exports

The UK is a major exporter of services. Moreover, services growth is outstripping goods growth and the services share of total goods and services is rising.26 Taking charts 3a-3c below, the main conclusions are:

In 2005, services exports totalled £129.3bn and represented nearly 38% of total goods and services in that year (£341.3bn). By 2015 services exports and grown by nearly 75% to £225.5bn, whilst goods exports had increased by less than 35% to £284.9bn. And services exports accounted for over 44% of total trade in 2015. Extrapolating these growth rates, services exports could effectively “catch up” goods exports over the next decade (annex table 2). The notion that the UK’s trade is dominated by goods is clearly mistaken.

Whilst the non-EU share of both goods and services (separately) exceeded the EU share in 2015, the disparity was significantly greater for the faster-growing export services sector. The non-EU share of goods was 53% whilst the non-EU share of services was over 60%.

Assuming that the UK’s trade will increasingly be services-based, this would mean, other things being equal, an increase in the relative importance of non-EU markets.

Chart 3a Exports of goods, services (£bn), 2005-2015

Goods, world

Services, world

100

150

200

250

300

350

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Goods, world Services, world

Chart 3b Exports of goods, services (£bn), 2005 and 2015, EU and non-EU markets

123.1133.5

54.5

88.989

151.4

74.8

136.6

212.1

284.9

129.3

225.5

0

50

100

150

200

250

300

2005, goods 2015, goods 2005, services 2015, services

EU Non-EU Total

7

Chart 3c Exports of goods, services, goods & services (% growth), 2005 and 2015, EU and non-EU markets

8.4

63.1

25.2

70.1

82.6

75.8

34.3

74.4

49.5

0

10

20

30

40

50

60

70

80

90

Goods, growth (%) Services, growth (%) Goods & services, growth (%)

EU Non-EU Total

Source: ONS, “UK Balance of Payments, The Pink Book: 2016”, July 2016. See annex table 2 for the data.

UK economy update

The economic data since our last Perspective continue to reasonably positive.27 Briefly the data have been (and see annex table 3 for updated data tracker):

Mortgage approvals for house purchase firmed a little in November to 67,505, compared with October’s 65,371 (revised), and were higher than the average for the previous six months (64,178). But they were still down on the recent peak of over 75,000 (January 2014).28

The amount outstanding on unsecured consumer credit rose to £192.2bn in November, the highest level since December 2008. The YOY increase was a very robust 10.8%, compared with 10.6% in October.29

Labour productivity (output per hour) rose by 0.4% (QOQ) in 2016Q3 to be 0.4% higher (YOY), whilst unit labour costs were 2.3% higher (YOY).30 But there remains concern over the “productivity puzzle.” Since 2010 productivity has tended to flatline, whilst in previous recoveries productivity growth resumed after downturns. The ONS has attributed some of the weakness to the relative poor performances since the recession of two high productivity sectors: North Sea Oil and financial services. More generally, the labour market has performed strongly in the recent recovery, whilst GDP growth has been relatively weak. Growth has been driven by falling unemployment and high net immigration, but with the unemployment rate now below 5% and the prospect of lower immigration, productivity growth will clearly have to improve if the economy is going to continue to grow.

Industrial production (15% of GDP) recovered by 2.1% (MOM) in November, after a 1.1% decline in October.31 The increase reflected a pick-up in mining and quarrying output (including North Sea oil) following the end of a maintenance period in the oil and gas industry. (Mining and quarrying jumped by 8.2%, after October’s fall.) Manufacturing (10% of GDP) grew 1.3% (MOM), following a 1.0% fall in October. The largest contribution came from pharmaceuticals, which can be highly erratic.

8

Construction output slipped 0.2% (QOQ) in November, largely due to a contraction in non-housing repair and maintenance, though was 1.5% higher than a year earlier.32 On a trend basis, construction output seems fairly flat.

The total trade (goods & services) deficit widened to £4.2bn in November, compared with £1.5bn in October.33 Monthly data are erratic but the trend seems to be fairly flat at present. Within total trade, the visible trade deficit rose to £12.2bn in November, compared with £9.9bn in October. Exports of goods increased by £0.7bn (MOM), whilst imports rose by £3.0bn. More encouragingly, exports of goods in the three months to November rose by 4.6% (QOQ), whilst imports rose by 3.2%. The services surplus was estimated to be £8.0bn in November, compared with October’s £8.3bn.

The much-followed Markit/CIPS surveys for the three main economic sectors indicated an across-the-board pick-up in growth in December.34-36

NIESR estimated that GDP grew by 0.5% (QOQ) in the three months ending in December 2016 after growth of 0.5% in the three months ending in November 2016.37 They estimate 2.0% growth for 2016 after 2.2% in 2015. GDP rose by 0.6% in both 2016Q2 and 2016Q3.

FTSE100 closed at another record high on 13 January (7337.81), as the weaker pound boosted overseas earnings. The pound fell after the PM’s TV interview (8 January), suggesting a “hard” Brexit, and could well ease further on her forthcoming Brexit speech (17 January).

Finally, the Bank appears to be preparing to upgrade its forecasts in the February Inflation Report (2 February), released with the February MPC minutes. As table 1 below shows, the Bank dramatically downgraded its GDP forecasts in August, then partly upgraded them in November.38 Bank Governor Carney suggested to the Treasury Select Committee (11 January) that the economy’s resilience (partly reflecting the Bank’s post-referendum activities, of course) would prompt such an upgrade. Separately, MPC member Michael Saunders suggested the unemployment rate was likely to remain below 5% this year (the Bank had forecast a rise to 5.4% by 2017Q4 in November).39 Moreover, discussing the Bank’s original assessment of the economic impact of the Brexit vote, Andy Haldane (the Bank’s Chief Economist) recently said “…it’s true, again, fair cop. We had foreseen a sharper slowdown in the economy than has happened, in common with almost every other mainstream macro-forecaster.”40 He also said the fact that the UK economy had held up better than predicted in the aftermath was a “thoroughly good thing”, putting it down to consumer confidence and the housing market, adding that it was “…almost as though the referendum had not taken place” and that people’s spending power had not been “materially dented” in 2016. Table 1 Bank of England’s Forecast summary: November 2016 (August 2016 in brackets)

2016 2017 2018 2019

GDP growth rate (%) 2.2 (2.0) 1.4 (0.8) 1.5 (1.8) 1.6 (na)

2016Q4 2017Q4 2018Q4 2019Q4

CPI inflation rate (%) 1.3 (1.2) 2.7 (2.0) 2.7 (2.4) 2.5 (na)

Unemployment rate (LFS, %) 4.9 (5.1) 5.4 (5.5) 5.6 (5.5) 5.6 (na)

Bank Rate (market expectations) 0.2 (0.1) 0.2 (0.1) 0.3 (0.2) 0.4 (na)

9

Source: Bank of England, Inflation Report, November 2016, modal projections for GDP, CPI inflation & LFS unemployment (table 5B).

10

References

1. Daily Telegraph, “Europe to hold no sway over UK courts post-Brexit, insists May”, 14 January 2017. 2. Ruth Lea, “Brexit really does mean Brexit: Article 50 to be triggered by end-March 2017”, Arbuthnot

Banking Group, 10 October 2016. 3. Reuters, “The government is preparing to lose the Brexit Supreme Court case”, 11 January 2017. 4. Ruth Lea, “The ECB announces a “dovish” taper as the Eurozone continues to recover, albeit modestly”,

Arbuthnot Banking Group, 12 December 2016. The amendment was to a Labour Party motion requiring that the Government should present a “Brexit plan” before invoking Article 50 (passed by 448 votes to 75, a margin of 373).

5. Exiting the European Union Committee, “The process for exiting the European Union and the Government’s negotiating objectives”, 14 January 2017.

6. BBC, “Brexit: MPs urge May to clarify trade aims before talks”, 14 January 2017. 7. Ruth Lea, “Post-Brexit trading options for the UK”, Arbuthnot Banking Group, 4 July 2016. 8. Ruth Lea, “The Authorities begin to get to grips with Brexit: post-referendum update”, Arbuthnot

Banking Group, 18 July 2016, also discussed the Commonwealth’s potential for trade deals. 9. Ruth Lea, “Planning for Brexit if we vote to leave – British option”, Better Off Out website, 25 May 2016. 10. Tariffs were discussed in two recent Perspectives: (i) “Post-Brexit trading options for the UK”, 4 July

2016 and (ii) “The UK economy continues to progress and the Bank shifts into neutral”, 7 November 2016.

11. Ruth Lea, “The City would hold a strong hand after Brexit”, FT, 12 May 2016, discussed the prospects for financial services and regulatory equivalence in the event of a Brexit vote.

12. ONS, “UK trade: November 2016”, 11 January 2017. 13. Trade with the Netherlands and Belgium is distorted by the Rotterdam-Antwerp Effect reflecting UK

exports routed through these ports for other destinations. 14. Daily Telegraph, “Carney: Brexit not biggest threat to economy”, 12 January 2017. 15. Guardian, “EU negotiator wants ‘special’ deal over access to City post-Brexit”, 14 January 2017. 16. CityAM, “Carney can see what EU officials refuse to: they need the City”, 13 January 2017, reported

that, given there is nowhere else in Europe that can provide EU businesses with the kind of capital, financing or services that the City offers, the EU would be likely to hurt itself more than it would hurt the UK if it tried to extract too high a price during the Brexit negotiations.

17. Daily Telegraph, “Carney: Brexit not biggest threat to economy”, 12 January 2017. Carney said the risks associated with the EU had receded, while the market turmoil predicted by some had not materialised. He noted that the Bank’s action had helped to mitigate the impact of the vote. The Financial Policy Committee had warned about the increase in consumer debt.

18. Guardian, “EU negotiator wants ‘special’ deal over access to City post-Brexit”, 14 January 2017. The article also noted “a spokesman for the European commission insisted that the minutes, which were drawn up by European parliament officials, did not “correctly reflect what Mr Barnier said”. A source present at the meeting, however, described the minutes as “more or less accurate”. Barnier discussed the problems of financial services, the source said, although the negotiator’s preferred options were not clear. The suggestion recorded in the minutes mirrors the view of the governor of the Bank of England. Carney said other EU nations relied heavily on the City for their financial needs and could face serious problems if international banks based in London were no longer able to gain easy access to European countries and corporations. “If you rely on a jurisdiction [the UK] for three-quarters of your hedging activities, three-quarters of your foreign exchange activity, half your lending and half your securities transactions, you should think very carefully about the transition from where you are today to where the new equilibrium will be,” he said. The fear is that European governments and companies would find it harder and more expensive to raise capital if they were denied access to the City, which acts as Europe’s investment bank. Countries such as Italy, with very large national debt, are concerned that their economies would become even more fragile if financing costs rose.”

11

19. Daily Telegraph, “Lack of a post-Brexit plan does not mean end of trade”, 9 January 2017, reported that the UK, a member of the WTO, was re-establishing its own schedules for trade in goods and services. Currently, the Government wanted to keep the same “set-up” (tariffs and quotas) the EU uses now.

20. Daily Telegraph, “UK business will prosper, even with a “hard Brexit” says Fitch”, 13 January 2017, reported that Fitch (a rating agency) said UK businesses could cope even if the UK did not secure a (transition) deal and fell back on WTO rules for trade with EU27.

21. Ruth Lea, “Britain would benefit from new trade deals capitalising on Britain’s trading strengths”, Arbuthnot Banking Group, 15 February 2016, discussed the EU’s and EFTA’s preferential trade deals.

22. William Norton, “Mitigating the impact of UK-EU tariffs”, Civitas, 9 January 2017. 23. Norton specifically suggested a package of enhanced tax credits for research and development

spending, extra regional aid, the abolition of the UK carbon price floor which artificially increases electricity costs, and a sweeping-up Transitional Assistance Programme (to take advantage of de minimis exemptions in the WTO rules). The package would cost, allowing for leakages to non-exporting businesses and domestic consumers, about £8.8bn.

24. Ruth Lea, “Trade with the EU is important, but is in relative decline”, Arbuthnot Banking Group, 6 June 2016.

25. Ruth Lea, “The OECD-WTO “trade in value-added” research: a break-through in analysing world trade”, Arbuthnot Banking Group, 17 February 2014, discussed the TiVA research which allows for, amongst other issues, the distorting effects of the Rotterdam-Antwerp Effect.

26. Ruth Lea, “The economic growth rate in 2016Q3: some slowdown after the second quarter pick-up”, Arbuthnot Banking Group, 12 September 2016, also discussed the rising importance of services.

27. Ruth Lea, “The UK economy: still cautiously encouraging”, Arbuthnot Banking Group, 3 January 2017. 28. Bank of England, “Money and credit: November 2016”, 4 January 2017. 29. Bank of England, “Money and credit: November 2016”, 4 January 2017. 30. ONS, “Labour productivity 2016Q3”, 6 January 2017. 31. ONS, “UK index of production: November2016”, 11 January 2017. 32. ONS, “Construction output in GB: November 2016”, 11 January 2017. 33. ONS, “UK trade: November 2016”, 11 January 2017. 34. Markit/CIPS, “UK manufacturing PMI: Manufacturing PMI at 30-month high as growth of output and

new orders strengthen”, 3 January 2017. The Markit/CIPS manufacturing PMI was 56.1 in December, a 30-month high, compared with 53.6 in November and well above the long-run average (51.5). Gains were seen in the three sub-sectors: consumer, intermediate and investment goods. New export business rose for the 7th consecutive month, with increased levels of new work from the USA, Europe, China, Middle East, India and other Asian markets. The weak exchange rate continued to boost export competitiveness but added to cost pressures.

35. Markit/CIPS, “UK construction PMI: New order growth hits 11-month high in December”, 4 January 2017. The Markit/CIPS construction PMI was 54.2 in December, compared with 52.8 in November, signalling “a robust and accelerated expansion of overall construction output”. New order growth hit an 11-month high. Residential building activity remained the best performing category, whilst there was a robust pick-up in civil engineering projects. Commercial construction increased only marginally.

36. Markit/CIPS, “UK services PMI: UK service sector ends 2016 with strong expansion”, 5 January 2017. The Markit/CIPS services PMI firmed further, ending 2016 with “strong expansion”. The overall Business Activity Index was 56.2 in December, up on November’s 55.2, signalling the fastest expansion since July 2015. There was growth in both new business and outstanding business and continuing growth in employment. Cost pressures remained elevated.

37. NIESR, “GDP growth of 0.5 per cent in 2016Q4”, press release, 11 January 2017. 38. Ruth Lea, “The UK economy continues to progress and the Bank shifts into neutral”, Arbuthnot Banking

Group, 7 November 2016, discussed the November and August Inflation Reports (Bank of England). 39. Daily Telegraph, “Jobless rate likely to stay below 5%, says Saunders”, 14 January 2017. 40. BBC, “Crash was economists’ ‘Michael Fish’ moment, says Andy Haldane”, 6 January 2017. Haldane also

said that the failure to predict the financial crisis was a ‘Michael Fish’ moment for economists, comparing financial forecasts to the famously inaccurate forecast by the BBC weatherman, ahead of

12

the UK’s great storm of 1987. He added the profession was “to some degree in crisis” following the 2008-09 crash and the Brexit vote.

13

Annex

Table 1a UK trade: exports of goods and services, 2005 and 2015: aggregates & EU countries

2005 (£bn) 2015 (£bn) Growth (%)

Main aggregates:

World, of which: 341.3 510.3 49.5%

EU27 177.6 (52.0%) 222.4 (43.6%) 25.2%

Non-EU 163.7 (48.0%) 287.9 (56.4%) 75.9%

EU countries:

Austria 1.9 2.6 …

Belgium 14.3 15.1 5.5%

Bulgaria 0.3 0.8 …

Croatia 0.1 0.3 …

Cyprus 0.8 0.9 …

Czech Republic 1.5 2.9 93.3%

Denmark 4.0 5.5 37.5%

Estonia 0.1 0.3 …

Finland 2.4 2.7 …

France 27.2 32.1 18.0%

Germany 33.4 44.8 34.1%

Greece 2.5 2.2 …

Hungary 1.5 1.8 …

Ireland 23.6 26.1 10.6%

Italy 13.0 16.7 28.5%

Latvia 0.25 0.3 …

Lithuania 0.3 0.5 …

Luxembourg 1.1 2.4 …

Malta 0.4 1.1 …

Netherlands 20.2 29.3 45.0%

Poland 2.8 5.6 100.0%

Portugal 2.4 2.5 …

Romania 0.8 1.7 …

Slovak Republic 0.4 0.9 …

Slovenia 0.3 0.3 …

Spain 15.0 14.6 -2.7%

Sweden 6.6 8.5 28.8%

Table 1b UK trade: exports of goods and services, 2005 and 2015: non-EU with EU RTA

2005 (£bn) 2015 (£bn) Growth (%)

Albania [0.018] [0.023] …

Algeria Na Na Na

Andorra Na Na Na

Bosnia & Herzegovina Na Na Na

Cameroon Na Na Na

CARIFORUM States, Economic Partnership Agreement (EPA) Na Na Na

14

Central America (Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua & Panama)

4.2 3.9 -7.1%

Chile (comprehensive), FTA 0.3 0.7 …

Colombia & Peru: Na Na Na

Colombia 0.2 0.6 …

Côte d’Ivoire Na Na Na

Eastern & Southern Africa States, interim EPA Na Na Na

Egypt 0.9 1.7 …

Faroe Islands Na Na Na

Macedonia (FYROM) Na Na Na

Georgia Na Na Na

Iceland (EFTA) 0.3 0.4 …

Israel 2.0 2.1 …

Jordan Na Na Na

Korea (South), FTA 2.4 5.6 133.3%

Lebanon Na Na Na

Mexico, FTA 1.0 2.0 100.0%

Montenegro Na [0.021] …

Morocco 0.25 0.85 …

Norway (EFTA) 4.2 5.7 35.7%

Overseas Countries & Territories (OCT) Na Na Na

Palestinian Authority Na Na Na

Papua New Guinea & Fiji Na Na Na

Moldova Na Na Na

San Marino Na Na Na

Serbia 0.1 0.2 …

South Africa, FTA 3.3 4.1 24.2%

Switzerland-Liechtenstein:

Switzerland (EFTA) 10.2 19.8 94.1%

Liechtenstein (EFTA) [0.002] [0.73] …

Syria Na Na Na

Tunisia Na Na Na

Turkey (CU) 2.7 4.8 77.8%

Ukraine 0.4 0.4 …

EEA, see Iceland, Norway, Liechtenstein Na Na Na

Total non-EU/EU deal (identified countries) 32.45 52.85 62.9%

Swiss share of total non-EU/EU deal (identified countries) 31.4% 37.5% Na

Total non-EU/EU deal (identified countries) share of non-EU 19.8% 18.4% Na

World shares:

World exports (see above) 341.3 510.3 49.5%

EU27 exports, world share in brackets 177.6 (52.0%)

222.4 (43.6%)

25.2%

Non-EU exports (see above), world share in brackets. Of which:

163.7 (48.0%)

287.9 (56.4%)

75.9%

Total non-EU/EU deal (identified countries), world share in brackets

32.45 (9.5%)

52.85 (10.4%)

62.9%

Non-EU minus total non-EU/EU deal (identified countries), 131.25 235.05 79.1%

15

world share in brackets (38.5%) (46.1%)

Table 1c UK trade: exports of goods and services, 2005 and 2015: selected non-EU, no EU RTA

2005 (£bn) 2015 (£bn) Growth (%)

Europe:

Russia 3.0 5.65 88.3%

Americas:

Argentina 0.3 0.65 …

Brazil 1.2 3.8 216.7%

Canada (Comprehensive Trade and Economic Agreement (CETA), not yet operative)

5.25 7.3 39.0%

US 56.0 100.3 79.1%

Asia:

China: PRC (talks launched 2013) 4.6 16.3 254.3%

China: HK 4.5 7.8 73.3%

India (stalled talks with EU) 4.2 6.55 56.0%

Indonesia 0.6 0.9 …

Iran 0.7 0.2 …

Japan (launched 2013) 8.4 10.45 24.4%

Malaysia (launched 2010) 1.6 2.2 …

Pakistan 1.0 0.95 …

Philippines 0.4 0.6 …

Gulf Cooperation Council (talks suspended):

Saudi Arabia 3.9 6.6 69.2%

Residual Gulf Arabian countries (excluding Saudi Arabia) 9.3 14.6

57.0%

Singapore (not yet ratified) 4.8 7.8 62.5%

Taiwan 1.6 1.8 …

Thailand 0.9 1.9 …

Australasia & Oceania:

Australia 5.7 8.3 45.6%

New Zealand 0.8 1.1 …

Sources: (i) WTO website for EU RTAs (Regional Trade Agreements) in force; (ii) ONS, “Pink Book, 2016 edition” for trade in goods and services, which only identifies the main trading countries. The unidentified countries are marked above as “na”. Notes: (i) Growth rates are not calculated for minor trading partners; (ii) Caribbean Forum (CARIFORUM) comprises 15 Caribbean Community (CARICOM) States plus the Dominican Republic. Table 2 Exports of goods, services, goods & services, 2005 and 2015

2005 (£bn) 2015 (£bn) Growth (%) Extrapolating for 2015-2025, taking growth 2005-

16

2015

Goods (share in brackets):

EU 123.1 (58.0%) 133.5 (46.9%) 8.4% 144.7 (8.4%)

Non-EU 89.0 (42.0%) 151.4 (53.1%) 70.1% 257.5 (70.1%)

402.2 (41.2%)

Total 212.1 284.9 34.3% 382.6 (34.3%)

Services (share in brackets):

EU 54.5 (42.2%) 88.9 (39.4%) 63.1% 145.0 (63.1%)

Non-EU 74.8 (57.8%) 136.6 (60.6%) 82.6% 249.4 (82.6%)

394.4 (74.9%)

Total 129.3 225.5 74.4% 393.3 (74.4%)

Goods & services (share in brackets):

EU 177.6 (52.0%) 222.4 (43.6%) 25.2%

Non-EU 163.8 (48.0%) 288.0 (56.4%) 75.8%

Total 341.3 510.3 49.5%

Source: ONS, “Pink Book, 2016 edition”. Table 3 ONS & BoE releases: economic data tracker

Date Release 2016Q3 2016Q4 Outcome

15 Nov CPI (November) 2016Q4 YOY inflation: 1.2% (November), 0.9% (October)

15 Nov PPI (output) (November) 2016Q4 YOY inflation: 2.3% (November), 2.1% (October)

15 Nov PPI (input) (November) 2016Q4 YOY inflation: 12.9% (November), 12.4% (October)

15 Nov House prices (October, ONS) 2016Q4 YOY inflation: 6.9% (October), 7.0% (September)

16 Nov Employment (3 months to October)

2016Q4 -6k (QOQ), +342k (YOY)

16 Nov Unemployment (3 months to October)

2016Q4 -16k (QOQ), -103k (YOY)

16 Nov Unemployment rate (3 months to October)

2016Q4 4.8%, compared with 5.2% a year earlier

16 Nov Vacancies (3 months to November)

2016Q4 748k, compared with 751k (previous quarter) and 743k (previous year)

16 Nov Earnings (3 months to October)

2016Q4 2.5% (YOY, total), 2.6% (YOY, regular pay, excluding bonuses)

17 Nov Retail sales (November) 2016Q4 Volume: 0.2% (MOM), 5.9% (YOY)

22 Nov Public sector finances, PSNB (November)

2016Q4 PSNB: £12.6bn (Nov 2016), £13.2bn (Nov 2015)

22 Nov Public sector finances, public sector net debt (PSND) (November)

2016Q4 PSND: £1,655.1bn, end-Nov 2016 (84.5% of GDP), £1,596.5bn, end-Nov 2015 (84.4% of GDP)

17

25 Nov Services (October) 2016Q4 Output: 0.3% (MOM), 3.2% (YOY)

25 Nov GDP (2016Q3, 3rd estimate) 2016Q3 GDP: 0.6% (QOQ), 2.2% (YOY)

25 Nov Business investment (revised)

2016Q3 +0.4% (QOQ); -2.2% (YOY)

25 Nov Gross Fixed Capital Formation (GFCF)

2016Q3 +0.9% (QOQ); +0.5% (YOY)

23 Dec Current account, balance of payments (2016Q3)

2016Q3 Current account deficit of £25.5bn (deficit of £22.1bn in 2016Q2)

4 Jan Money & credit (November), Bank of England

2016Q4 Mortgage approvals for house purchase (number): 67,505 (November), 65,371 (October)

4 Jan Money & credit (November), Bank of England

YOY change in unsecured consumer credit: +10.8% (November), +10.6% (October)

11 Jan Index of production (November)

2016Q4 Production (November): +2.1% (MOM), +2.0% (YOY); Manufacturing output (November): +1.3% (MOM), +1.2% (YOY)

11 Jan Construction output (November)

2016Q4 Output (November): -0.2% (MOM), +1.5% (YOY)

11 Jan UK trade (November) 2016Q4 Trade (goods & services) deficit £4.2bn (November), £1.5bn (October). Visible trade deficit £12.2bn (November), £9.9bn (October).

Sources: (i) ONS website, (ii) Bank of England website. ONS unless otherwise stated.