The UK’s broken supply side

Peter Warburton - March 11, 2021

The UK has made a disastrous start to 2021 in terms of international trade and supply transmission. Hard data is still thin on the ground, but it is becoming clear that significant segments of the UK economy are battling to re-engineer their supply chains in the wake of Covid-19 disruptions and departure from the European Union. I have long held the view that, in economic terms, Brexit would be a negative sum game: negative for both the UK and the EU27, probably in perpetuity. Some of this may simply be described as teething problems, but rather more is down to structural dislocation and the breakdown of trust. The brokenness of the supply side is likely to become more obvious and important when the engines of demand are firing on all cylinders again.

Essentially, the UK has overlaid a regional supply crisis on a global one. According to Brian Pellegrini of Intertemporal Economics, global shipping and air cargo freight systems are in a state of disarray, creating bottlenecks in the global value chain. The global average daily rate for container transport is up by about 250 per cent, year-on-year, on an unweighted basis, as dozens of vessels are stacked up, waiting to unload. Pinch-points in the global supply network have become binding constraints on activity: trying to force more traffic through them is a recipe for frustration and inflation. The looming threat of trade protectionism is another potential source of aggravation. Nearly half of air cargo capacity pre-Covid-19 was in the belly of passenger planes, resulting in a significant loss of global capacity and an explosion of cargo rates. 

We await UK monthly trade data for 2021, but the situation in the latter months of 2020 looks far from promising (figure 1). While UK exports and imports took broadly similar proportionate hits when lockdowns were imposed a year ago, imports have recovered more powerfully.  Germany recently reported a 60 per cent drop in imports from the UK in January, from a year earlier. The comparable figure for Italy may have been worse, while a separate source suggested a 20 per cent drop in UK exports to France between December and January. In a recent Markit survey of UK manufacturers, about 58 per cent of companies reported longer delivery times from suppliers, while only 2 per cent saw an improvement, as international shipping  and port delays, worldwide demand for raw materials and Brexit-related trade issues weighed on activity.

Shipping container availability at key U.K. ports is on the rise (figure 2) as imports pour in faster than the boxes can be turned around for the export market, according to figures from Hamburg, Germany-based Container xChange, an online platform.  It is much easier for imports to divert from an EU to a non-EU source than for UK exports to divert from EU to non-EU markets. The UK is at a structural disadvantage and risks opening an ever-wider visible trade deficit and suffering an escalation in Sterling import prices. In the final 3 months of 2020, the import deflators for food rose 3.4 per cent, material manufactures, 3.3 per cent, and “unspecified goods” by 17 per cent.  There is a growing concern that hopes of a lasting consumer recovery will founder on the UK’s broken supply system.  

Figure 1

Source: Office for National Statistics

Figure 2

Source: Bloomberg


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