The Associated Press
A virus that got out of hand has brought the world to a virtual halt in a short time. It is by no means clear yet how long it will take and what consequences this will have for people, the economy and the environment. It is clear now that the corona crisis is hitting Europe hard and that many countries suffer from its paralyzing effect on the entire social system and fabric in the many countries affected. The first quarter of 2020 will prove to be a tipping point in the long-term economic growth that is now behind us.
Just when the British thought they had severed ties with the EU to secure their sovereignty, they had to surrender to the compelling fickleness of a virus that proves hard to subdue and places governments for huge dilemmas. It puts leadership to the test and exposes government leaders to examination over the words used and scrutiny of the tone, decisiveness and effectiveness of actions taken.
On January 31, the last day that the United Kingdom was officially part of the EU and the country prepared to celebrate - albeit in a generally modest way - the first two cases of COVID-19 presented themselves. At the time, there were seven confirmed cases of COVID-19 in France, 5 in Germany, 2 in Italy and 1 in Finland. The day before, on January 30, WHO had declared COVID-19 a global emergency. Much has gone wrong in the UK since then.
Leadership failure
The British government has long hesitated to take decisive action to combat the spread of COVID-19. Almost eight weeks passed before real measures came into effect. An analysis by The Times shows that during that period (until the end of February) the government hardly listened to advisers, ignored requests to order protective gear and was insufficiently engaged in COVID-19 crisis. There was high but utterly misplaced confidence in an already existing 'pandemic plan', although its latest evaluation in 2016 revealed an endless list of flaws. The most important of these was that health care would collapse under the pressure of a pandemic crisis and that protective equipment and respiratory equipment would soon be in short demand. Recommendations to amend the shortcomings were not implemented. Reason: all available resources were focused on the planning and implementation of Brexit. Existing and up to date plans were not deployed in February and almost no ministry activated and sharpened their sub-plans for a pandemic during that period. In other words, the danger of a pandemic has been consistently and systematically underestimated and ignored by the British government. Boris Johnson was missing from major crisis talks, retired to the countryside in February for nearly two weeks, and hates working on the weekend anyway (still according to The Times analysis). Personal circumstances, such as the settlement of his divorce, engagement to and pregnancy of his partner Carrie Symonds, played a role in his "absence" as well.
It remains to be seen whether the positives of his battle with COVID-19, his gratitude expressed to the NHS afterwards, the outpour of support during this challenging period is sufficient to protect him against harmful exposure from this leadership fiasco. Meanwhile, the COVID-19 burden on the UK is high. More than 20,000 British people died, 150,000 people have been tested positive for COVID-19, and the end of the crisis is nowhere in sight yet. Inconveniently the promises made by Johnson for the post-EU era (see my previous Brexit monitor), need to be dealt with as well. Despite a very comfortable majority of his party in the House of Commons, the sum of all these parts make Johnson very vulnerable. He needs to protect his loyal fans from personal hits in their pockets and need to deliver on the promise of the sovereign Valhalla he and his conservative friends promised in when campaigning for Brexit and in the last elections. If unsuccessful in successfully securing these challenges, the demanding British media will have lots of ammunition to fill their magazines and broadcasts for months to come and in the process, generally, show little compassion for sitting ducks.
Brexit: now what?
Realistically and ignoring all noise for public consumption to the contrary, all post-Brexit, EU-independent scenarios, whether rosy or not, are off the table for now. It will be challenging enough for the British government to find the necessary focus to deal adequately with the corona crisis, let alone to conclude vitally important negotiations on its future relationship with the EU. The UK must ask itself whether keeping up the current charade of pushing to get negotiations done before the end of the year, will help them under current circumstances. "It takes two to tango", and you don't have to be a great political talent to see that the priorities in the EU are now elsewhere (corona crisis, climate, budget, etc.). In other parts of the world, this will be no different. There is no simple route to concluding trade agreements, especially if your main trading partners are all in survival mode as well. In short, it will be tough for the British to achieve their Brexit objectives within the desired timeframe. It also shows that sovereignty in a connected world, be it through trade or corona transmission, is an illusion. You may think you live on an island, but that is not necessarily the case.
Everything will change shortly. Forecasts can go into the trash, and COVID-19 will significantly impact comparisons from the first quarter of 2020 onwards, due to the shift in different economies.
In the recent April issue of the IMF''s World Economic Outlook (WEO), it adjusted its projections for 2020 and 2021 for the impact of COVID-19. I think that the IMF severely underestimates the economic impact of COVID-19, especially in the area of unemployment, but for the time being, lacking more educated assessments, it should do:
Based on the IMF assessment, it appears that the UK, compared to the Netherlands and the EU in general, weathers the COVID-19 storm best. In large part, this might be due to the widening of the budget deficit. Time will ultimately tell, but by eliminating the impact of COVID-19 on GDP development, the projections may provide some (tentative) guidance in assessing how Brexit itself will affect the performance of the economies of the United Kingdom and the EU as a whole.
Brexit monitor fourth quarter 2019
Starting January 1, 2015, the Brexit monitor follows the British economy in its economic development and tracks it against that of the Netherlands and the EU as a whole. For this purpose, I have selected six parameters from the real economy and two that are indicative of confidence in this (see my first Brexit monitorfor further details and explanation).
The EU overtook the UK economy a year ago and has since been the worst-performing economy (minus 0.9 points). Uncertainty about Brexit will undoubtedly play a role in this, and the widely shared relief about the unambiguous outcome of the December elections has not yet penetrated the monitor. Over the past year, the EU (sans the UK) has recorded modest gains in the monitor (plus 0.5 points), while the Netherlands managed to maintain the upward trend (plus 1.1 points). From the next quarter onwards, the impact of COVID-19 on all economies within this monitor will change the numbers significantly. As of the first quarter of 2020, the quarter in which Brexit finally is a fact, the monitor will be recalibrated with the fourth quarter, 2019 as the new reference point going forward
Changes from last quarter and a year ago
For all the economies studied, both consumers as business confidence suffered greatly at the end of 2019. COVID-19 was not yet on peoples mind, but the feeling that "it" somewhere ends after many years of economic growth will undoubtedly play a role. The erratic behaviour of US President Trump has an unsettling effect on geopolitical relations, many segments of the economy, and thus on stock markets as well.
The increase in the total wages and compensation within the financial sector is striking. In addition to the continuous growth in the British market (plus 0.9 points in the last quarter, plus 5 points on an annual basis), the Netherlands also experiences gains after years of declines (plus 1.2 points in the previous quarter, 1.6 points on a yearly basis). British exports also continue to increase, but annual growth (plus 1.0 point) is lagging behind that of the EU (plus 2.7 points) and the Netherlands (plus 3.6 points). This trend holds in all other dimensions in the index as well. Another item of interest is the steady growth of house prices in the EU and the Netherlands in the past year (5.5 and 8.1 points increase respectively).
The overview above shows the relative values, with the second quarter of 2016 as a benchmark (index = 100). The table below shows the absolute values for the fourth quarter of 2019, which makes it possible to gain a better insight into the order of magnitude in which the results move.
I also always specifically look at house price developments in London, the beating heart of the British economy, with the last quarter being especially strong. In the past year, house prices there have risen by an average of 2.3%. In the most expensive Kensington & Chelsea district, however, house prices have fallen by 3.8% in the past year (average house price there are now ₤1,294,907). The most significant drop in prices occurred in the Camden borough with 9.8% lower house prices (average house price there was ₤ 779,779). In Brent, next to Camden, prices rose the most by 5.9% (average house price in September ₤ 505,388).
Development of exports to and from the United Kingdom with the Netherlands and the EU
I separately monitor the exports between the Netherlands, the United Kingdom and the EU. From June 2016, the volume of exports in GBP from the United Kingdom to the Netherlands and the EU has increased significantly (plus 37.3% and 25.8% respectively). This increase is due primarily to the drop in the exchange rate between the GBP and the euro ( by 14.6%). Since 2015 exports from the Netherlands to the UK have grown by 16.1% (from the UK to NL this is plus 8.7%). Exports from the Netherlands to the rest of the world have even increased by as much as 24.9%. The negative 'Brexit effect' that Dutch exporters continue to make noise about does not seem to be the case, based on the finding of alternative sales markets and volume growth, from the aggregated figures (for the time being).
Final thoughts
The UK government has done itself a disservice by responding to COVID-19 unprepared and so late. Johnson's focus on "Getting Brexit Done" is the most apparent cause for this. It turned a manageable disaster into an uncontrollable catastrophe. There is no sensible prognosis as to the extent of the damage that COVID-19 will ultimately cause. From a medical point of view, it is now likely that preventive measures, rapid detection and contact investigations are crucial to protect human life and preventing the overload of the health system. Once in 'lockdown', the way back is politically tricky as slow normalization may be necessary but will take too long in the eyes of public opinion. This exit strategy dilemma is not a unique problem for the UK, but the confluence with Brexit does play an important role. It does not help that once the corona passes its peak, the media will attack the wisdom of each and all of the UK government's chosen priorities. It will explore the quality of the decision-making process around COVID-19 and all the challenge its socio-economic implications. It will challenge whether measures were taken or not taken in time for each specific group. In short, Johnson needs to prepare for severe scrutiny of all aspects of handling COVID-19 and Brexit, as it will no longer be possible to hide behind illusions, but now the time comes he needs to answer to the facts.