Investors in commodity markets may have to eat a little more humble pie as the Brexit delays grow.
Brexit has already made themselves felt in the UK economy and has pushed up the price of oil and iron ore. A number of business surveys have shown that the uncertainties about the effects of the referendum vote have started to show in the economy, with the British manufacturing sector weakening in January and consumer spending falling for the first time in five months.
But there are signs that the hurt is spreading to other parts of the economy as well.
A BDO analysis of the impact of Brexit through all kinds of sectors, based on interviews with more than 10,000 businesses of all sizes in the UK, found that factors such as uncertainty, recession, trade tariffs and EU-related investment delays were responsible for an average rise of just 0.2 per cent in prices last year.
Now, BDO says, Brexit must “be taken seriously” by anyone seeking to invest in the UK. That will mean the cost of food will rise with border friction and overseas workers may be less available.
“While Brexit is not a direct contributor to the current increase in prices, its effects appear to be intensifying, with food and consumer goods facing the biggest price pressures,” said Frances Hudson, a partner at BDO.
The analysis is based on comparisons between last year’s prices of goods produced in the UK and those produced overseas, which BDO assumes had no benefit from the Brexit vote. But the projected rise in British exports means the import costs are rising too.
The IMF believes that the UK’s trade position has strengthened post-Brexit, with an increasing proportion of global demand coming from overseas rather than from UK domestic demand.
But that shift looks very different if the UK is outside the EU. If the UK were to have to pay to export goods to the EU, such a move is sure to raise the cost of food — and the major supermarket chains, including Tesco, Sainsbury’s and Walmart-owned Asda, have already said that goods would have to come from outside the EU.
“UK food producers will now face increased costs as they compete with European producers outside the EU who pay the fixed EU duty,” BDO said.
Fresh meat and vegetables are among the items that are likely to see a price increase as a result of the scarcity of EU workers.
A number of food companies such as the Co-operative Group, in a post-Brexit report, have warned that prices for British farmers may rise unless they can get access to cheaper labour. For many, the answer is to increase the numbers of overseas workers, but government attempts to boost the number of non-EU workers has so far been sporadic and limited in scope.
The BDO survey found a clear change in the makeup of consumer spending as the months have gone by. Surveys have highlighted consumers’ concerns about the cost of living but Brexit-related uncertainty has a double effect.
Household spending has been sharply curtailed in the last year as households have not been able to cut their spending budgets while the Pound has weakened against the dollar and the euro.
But as the spending has been cut back, the supply of fresh food in Britain has slumped due to the lack of EU workers, reducing the supply of food in supermarkets and cafes. The anticipated fall in foreign-produced food and a stronger pound, weighing on the prices of food, may begin to eat into consumer spending again.