Why Brexit Britain Is Isolated, Vulnerable and Running on Fumes

(Bloomberg) -- Lines of cars snake from gasoline stations. Fights break out among angry motorists trying to get fuel. Grocery staples are out of stock on store shelves. A charity warns that doubling heating bills will force a million households to rely on extra blankets to stay warm.

This was supposed to be the year the U.K. broke free of the European Union and forged ahead as a buccaneering free trader, delivering the benefits of a new, confident “Global Britain” to workers and companies at home. Instead, that picture of Brexit utopia is looking more like a dystopia.

As Prime Minister Boris Johnson’s Conservative Party gathers at its annual conference this week, the promise of self-determination has given way to a foreboding sense of economic isolation.

A confluence of crises has forced the government to deploy soldiers to drive fuel trucks, energy suppliers to go out of business and panicked households to try and fill cupboards—all while Covid-19 is still rife.

The pound, meanwhile, has been trading like an emerging-market currency rather than from a steady Group of Seven country. The governor of the Bank of England, Andrew Bailey, even quipped whether a plague of locusts would be next to beset the U.K. He now has the task of figuring out how to raise interest rates to subdue inflation without choking the economy.

The Confederation of British Industry, the biggest business lobby, is urging Johnson to set up an emergency taskforce to deal with the supply shortages and cost of living. The country faces “a perfect inflationary storm” that could plunge the economy into a recession next year, according to Gavekal Research. Retail executives predict food prices will rise at an annual pace of 5% by the end of the year.

“The recovery is in a very fragile state,” said Karan Bilimoria, the CBI’s president. “The nightmare scenario is a ‘winter of discontent’,” he said, evoking the period in the late 1970s when strikes and shortages led to the downfall of the Labour government. “The basics not being available is what we’ve got to try and prevent.”

The immediate challenges facing the U.K. stem from the loss of a vital pool of labor after its transition out of the EU ended on Jan. 1. A dearth of truckers is raising fears not just about toys or turkeys for Christmas, but whether people will have enough fuel and food this winter.

The government said late on Sept. 25 it plans to issue short-term visas for truck drivers and poultry workers, though businesses say it won’t come close to filling the gap. Johnson said on Sunday the U.K. also won’t go back to relying on immigration to solve the shortage. There are also deficits of people across industries from agriculture and meat to hospitality.

The National Pig Association estimates 150,000 pigs are stuck on farms because of a shortage of gas to stun them and not enough people to process them.

Bloomberg Economics forecasts economic growth will slow to 1.3% in the fourth quarter from 1.6% in the previous three months. Although that still leaves the economy on course to expand 6.3% for the whole year, inflation is set to end the year above 3% and stay there until mid-2022.

The root of the U.K.’s outsized struggles are broader and come down to its dependence on trade, an asset before the pandemic that allowed for lean supply lines and championed by supporters of Brexit. That reliance now magnifies the damage from leaving the EU and Covid-19 disruption.

Exports and imports as a share of gross domestic product peaked at 63% in 2019 before slumping to 55% last year, according to World Bank figures. By comparison, the ratio was 46% for Australia, 35% for Japan and 24% for the U.S.

John Shirley, a U.K. freight forwarder, feels the supply shocks rattling the world—the shipping delays, the skyrocketing costs, the general fog of uncertainty blanketing the global economy. But he has faced another constant headache on top of the pandemic over the past nine months. “All this extra paperwork,” he says, “all this extra hassle.”

That was the predictable reality of Brexit. Hauling a truckload of refrigerators to the U.K. from Italy, for example, costs nearly 25% more than before the split from the EU. Starting in January, trucks arriving at U.K. borders will face new customs controls, and food products will be subject to onerous documentary rules beginning next July.

But what British households are also waking up to is that among the imports the U.K. relies on is natural gas for heating and electricity generation. Domestic gas prices have more than quadrupled this year, following a similar move for the benchmark European price in the Netherlands. A colder- and longer-than-average winter left Europe’s stockpiles depleted while Russia has been exporting less to the continent.

Storage in the U.K. itself is already scarce, and in the first full winter of Brexit, that reliance on imports will be tested. The situation could ease if a contentious new pipeline, Nord Stream 2, is opened to connect Russia to Germany via the Baltic Sea. But a last round of political wrangling still stands in the way. The best hope might be for the weather to be a few degrees warmer than average.

“The U.K. is not always fully aware how reliant it is on European storage,” said Marco Alvera, head of Italian energy infrastructure company Snam SpA. “If it gets very cold—and it is not a Brexit-related thing—even within Europe you will see countries saying, ‘I have the gas inside my borders, I am going to pass an urgent safety measure that no one can export for the next two weeks.’”

Brexit campaigners led by Johnson acknowledge that adjusting to a divorce after more than four decades of marriage with the EU was always going to take time. And nobody, of course, could have predicted a pandemic would be raging just at the point of departure.

The narrative in the first half of 2021 was how the U.K.’s world-beating vaccination program allowed the government to unshackle the economy from Covid-19 restrictions in July. Since then, though, Britain’s vulnerabilities have become clearer, especially when it comes to maintaining supply chains.

Businesses had become too reliant on cheap foreign labor, according to Brexit advocates. Indeed, with fewer people to choose from, wages have already risen. But without access to free movement of workers within the EU, the number of drivers in the U.K. has fallen by more than third during the pandemic, figures from the Office for National Statistics show.

Supermarkets such as Waitrose have increased pay for new haulers and are dangling bonuses to lure recruits. But the structural changes in the economy are proving more painful and lasting than expected.

“It doesn’t matter which way you turn, something hits you in the face,” said Neil Palmer, operations director at Norton Hydraulics, a manufacturer based in St. Albans, north of London. “It’s like getting slapped with a wet fish every time you turn up to work.”

Norton is facing a multitude of problems, including rising steel prices, but the driver scarcity is the most worrying. Palmer used to receive 20 to 30 applications for a newly posted role. A recent job ad for a factory production operative received only one application, from North Africa, he said. “The hard times are to come,” said Palmer.

Labor shortages are hitting every part of the food supply chain, from dairy to seafood and vegetable processing, according to James Withers, chief executive officer of Scottish Food & Drink. Businesses are struggling from a lack of transport for food as well as a shortage of the staff to pack it, he said. “There are gaps on supermarket shelves and real pressures on the hospital supply chain.”

Across Europe there are pockets of worker shortages and the whole continent will feel the pinch of record energy prices. But Britain is also paying the price for its much-coveted exceptionalism. 

A quarter of Europe’s estimated 400,000 shortfall for truck drivers affects the U.K. That’s because tougher visa rules have meant those who left during the pandemic have struggled to return after Brexit. There are also backlogs for driving tests for new recruits.

In response, the Department for Transport pulled a U-turn, making 5,000 visas available to EU heavy-goods vehicle drivers of food and fuel for three months. It had already relaxed laws on drivers’ hours, taking the daily driving limit to 11 from nine.

The British Retail Consortium said this would only account for about a third of the drivers needed just for supermarkets alone to operate at full capacity ahead of Christmas. Ruby McGregor-Smith, president of the British Chambers of Commerce, likened the move to “throwing a thimble of water on a bonfire.”

What Bloomberg Economics Says…

“The U.K. enters the final stretch of 2021 facing the challenging mix of slowing growth and rising inflation. How the labor market adjusts to the government’s withdrawal of its furlough scheme this month will be central to the timing of any interest rate rise.”

—, senior U.K. economist. On the Terminal, click here for more. 

The next response will be key as ministers gather at the Conservative conference in Manchester, northern England. Johnson is keen to spend on big, eye-catching projects to help narrow the economic gap between U.K. regions, yet the immediate task is to fix the supply chain crisis.

The leader of the opposition Labour Party, Keir Starmer, hit out at the prime minister at his party’s conference in Brighton last week. “Level up? You can’t even fill up.” But Labour members also say that the crisis has to get a lot worse before Johnson is vulnerable.

For Chancellor of the Exchequer Rishi Sunak, the pressure revolves around how he’ll put money behind Johnson’s agenda and to invest in training. Think tanks such as the Resolution Foundation warn of a spike in unemployment after state support for furloughed workers ended on Sept. 30 while vacancies are at a record high. Bailey, the central bank chief, says “getting jobs filled” is the key concern.

In the food industry, a lack of workers has forced companies to curb output and the new post-Brexit trading rules have made it tougher to export British beef, pork, lamb and poultry. What’s more, surging energy prices spurred fertilizer plants to shut, curbing supplies of the vital carbon dioxide by-product that’s used to stun animals at slaughterhouses.

Such strains have pushed farmers like Kate Moore to the brink. Her family’s farm in East Yorkshire typically sells about 1,700 pigs to slaughterhouses weekly, but since mid-summer they’ve been told to curtail deliveries.

The National Pig Association is pleading with the government for more short-term visas for butchery workers as farms run out of space. Without a solution soon, Moore fears the farm will have to cull healthy animals. “I don’t think I’d come back from that,” she said. “We’re getting to the crisis point.”

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