Brexit may slow trade deals but shock could hit food markets

Brexit: Early days, but global uncertainty and blow to consumer confidence are already doing some damage.

Two weeks after the UK voted to leave the EU (with only 48.1% choosing to remain), clear consequences are emerging from the fog of speculation.

Already, there are signs from surveys that UK consumer confidence is in negative territory, and likely to stay there until Brexit negotiations get under way.

UK consumers have said they are pessimistic about the general economic situation, and an index measures this pessimism at 18 points lower than this time last year.

This is likely to reduce their spend on bigger-ticket items, and the food industry could suffer due to less eating out, and consumers buying cheaper foods, as they become more concerned about their finances.

Confectionery, ready meals, snacks, fresh produce, and soft drinks are the food sectors worst hit by this kind of consumer confidence slump, according to market experts.

In Ireland, these sectors of our food industry will be watching developments closely.

Across our food industry, there is a business as usual and wait and see approach to our largest single export market, the UK, taking over 41% of Irish food and drink exports, worth €4.4bn last year.

Exporters are counting on geographic proximity, common language and similar consumer tastes to offset the effects of Brexit uncertainty on our UK export business.

With sterling having now stabilised to trade around 82p for a euro, many Irish exporters have experienced currency fluctuations at least as bad as those following Brexit. The currency trends tell their own story; when the referendum result emerged, it was the pound, not the euro, that devalued (the pound dropped this week to a 31-year low against the US dollar).

In other words, the financial markets believe the UK will come off worst.

Further down the road, what can Brexit hold in store for Ireland’s farm and food industries?

When the UK leaves the EU, the loss of a net contributor will leave a hole in the EU budget.

That will have consequences for the Common Agriculture Policy (CAP), which soaks up about 40% of the EU budget. With the UK gone, the remaining big net contributors must agree to give a little more, while the big net recipients (mostly in Eastern and Southern Europe) will agree to receive a little less.

A more radical solution would be to expand the sources of revenue that go directly into the EU budget, bypassing national treasuries entirely. The main sources at present are customs duties and a share of VAT revenues.

Other possibilities include allocating revenues from the EU’s emissions trading scheme to the EU, enlarging its share of VAT receipts, or imposing new taxes on the financial sector.

The UK was one of the staunchest opponents of further moves in these directions, so they may gain ground in future years.

Worryingly for countries such as Ireland, which gain significantly from CAP, there are early indications from high up in Germany that the CAP will come under pressure. Sigmar Gabriel, the German minister for economic affairs and energy and the vice chancellor, has said the EU should reassess putting about 40% of its funds towards agriculture, leaving less funding for research, innovation or education.

Responding to Gabriel’s comments, Fianna Fáil agriculture spokesperson Charlie McConalogue warned that Brexit could lead to a €1.27bn reduction in the overall CAP budget of €54bn, and he called for assurances on future CAP funding.

Brexit isn’t all bad news for farmers. Those who fear the impact of EU trade deals can rely on Brexit undermining pending trade deals, because the UK has been one of the EU’s strongest supporters of free trade.

David Cameron’s government was a strong supporter of the US-EU Transatlantic Trade and Investment Partnership (TTIP).

Negotiations on this had stalled even before Brexit, which could now hit it on the head, and even spell the end of negotiations.

The government in Westminster has also supported the EU-Canada Comprehensive Economic and Trade Agreement (CETA), which still requires ratification. Now, the UK leaving the EU has thrown into question whether CETA can be ratified.

Brexit also undermines negotiations between the EU and the Gulf Co-operation Council (GCC) on a free-trade agreement.

EU talks with the Mercosur countries in South America, much feared by Irish farmers due to the threat of huge beef imports, may also be set back by Brexit, but the UK is quite likely to open up its own market to free trade after it leaves the EU.

Without the British, the balance of power in the EU would shift to countries that favour protectionism over free trade.

There is also worry in member states that without British civil servants and scientists, EU legislation will tilt more towards the interests of environmental lobbyists.

According to The Economist magazine, member state fears of protectionism and environmentalism may guarantee the UK a Brexit deal which essentially doesn’t change much.

The magazine quotes a fund manager saying that if Merkel lets the UK leave, “BMW would be on the phone in an instant shouting ‘are you crazy?’” Multinational firms like BMW thrive on free trade.

A Brexit impact on the geopolitical front which few will welcome is that it is likely to escalate Russia’s confrontation with Europe and with the US.

President Vladimir Putin has just decreed that the boycott of Western products will be extended to 2018; the August 6 next deadline is extended to December 31, 2017.

This boycott of fruit and vegetables, dairy and meat, from the EU, US, Australia, Canada, and Norway continues in retaliation for the EU and other countries extending sanctions against Russia, until 2017 in the case of the EU.

Russian leaders will feel their position is strengthened by anything that undermines EU political cohesion and NATO security cohesion —which includes Brexit.

On the wider geopolitical front, Brexit uncertainty leads to global uncertainty, because it increases the possibility of a global economic downturn.

Already fragile due to a sharp slowdown in emerging market growth and persistent weak growth in the US and Europe since the 2008-09 crisis, the global economy is depending on interest rates at historic lows.

Policymakers have few fiscal or monetary policy options remaining to stimulate growth, and the danger that Brexit could push this situation into an overdue global slowdown, or even recession, is a real consequence of the UK vote to leave the EU.

Slowdown or recession would hurt all industries, including food and farming.

However, the G7 group of leading nations, which includes the UK, have stated they are prepared to respond to post-Brexit volatility.

On the downside, emerging market debt — especially private sector debt — was already at historic highs, raising the risk of a crisis, and that risk is increased by Brexit financial and currency volatility, which could increase financing costs for emerging market nations and companies.

Brexit is predicted to stall a recent rise in commodity prices. That could increase the threat of a price shock further down the line, due to continued underinvestment in higher-cost supply.

Food industries may also have to worry about the effects of increasing terrorism.

Among those to welcome Brexit was the Islamic State (IS) terrorist organisation, celebrating it as a motivation to conduct further terrorist attacks in Europe.

An official IS communication channel released a statement on June 24 describing Brexit as a consequence of its terrorist campaign in Europe and Syria.

The threat of right-wing extremist violence in Europe may also have increased.

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