Decreasingly 'open' UK's growth prospects hit by Brexit instability

02 February 2018 Consultancy.uk

In the latest edition of the Growth Promise Indicator the Netherlands takes the number one spot, followed closely by Switzerland. Luxembourg, Hong Kong and Norway round off the top five. The UK places in a distant 13th, however, having fallen behind in how the country’s macroeconomic stability and openness are perceived, as the Brexit saga continues.

To better understand the prospect for growth of various countries across the globe, KPMG leveraged its vast store of country specific indicators, and analysis from its analysts, to develop what it calls its ‘Growth Promise Indicator’ (GPI). The index, which is in its second year, was recently turned into a reported, titled ‘Growth Promise Indicators 2018 report’, which considers the relative standing of top performers, as well as how various country groups fare in the key indicators.

The firm’s GPI is derived by drawing on a vast amount of independent global data sources, to create 15 categories which are then weighted into 5 key indicators, Macroeconomic stability, Openness, Human development, Quality of infrastructure and Quality of institutions, which are finally weighted into the country specific ‘Headline Index’ score. The data is used retrospectively to create a more robust analysis of the country’s current position.

Top 20

The Netherlands takes the number one spot, with a weighted score of 8.62 – the country offers a strong and stable macroeconomic environment, as well as high scores in infrastructure and institutional development. Switzerland misses out on first place to the Netherlands by a whisker, having performed particularly well in infrastructure and institution scores. Luxembourg rounds out the top three with a score of 8.29.

Top 20

While Europe dominates the top ten, with eight entries, Hong Kong placed fourth with a score of 8.25, backed by strong macroeconomic score (9.14 out of ten) and a perfect score on openness. Nordic countries, Norway (#5), Finland (#6), Denmark (#8) and Sweden (#9), perform particularly well at the top end of the top ten, with city state Singapore on (#7).

The UK finds itself in number 13, with a score of 7.57, just behind Canada and New Zealand. Britain has a strong performance in human development and institutional indices, but is negatively impacted in terms of macroeconomic stability and openness, in light of Brexit. While this could be viewed as a major concern for UK businesses in coming months, with various polls already suggesting CEOs are less than positive about future prospects, it is worth noting the country’s growth prospects are still rated higher than those of the EU’s largest economy, Germany. This may be in relation to the inconclusive German elections, which have seen Chancellor Angela Merkel unable to form a government for several months. However, as this situation, while volatile, is likely to resolve itself relatively soon, compared to the sustained uncertainty of Brexit at least, it is unlikely to damage Germany’s long-term growth potential.

Region scores

Aside from providing a global ranking of individual countries, the firm analyses long-term trends for various regions – highlighting, for instance, the growth of technological readiness back to the early 2000s.

Technology adoption

While North America remained well out ahead of Europe and developed Asia in the late 2000s, since 2012 the three regions have increasingly converged to a score of around 7, with Europe surpassing developed Asia in 2011. Eastern Europe saw a massive boost in i2008, which saw the region enter a period of accelerated development, while developing Asia has accelerated its rank since 2008 on the back of a slow start. The Middle East is the only major region to continue to lag behind.

The research also sought to compare scores for wider trends. The research noting that stronger institution scores tend to be correlated with higher technological scores, although the relation does not hold for all regions – particularly in the Asia Pacific region – investing heavily in improving their respective institutions before focusing on technology. Which, given the potentially disruptive effect of technology on society, strong institutions are likely required to limit the potentially adverse use of technologies.

Institutional score

Commenting on the rapid changes, the authors write, “Technological change can cause disruption as well as growth. The robustness and stability of a country’s institutions is a key factor in coping with this disruption. Major shifts in automation, for instance, can have telling impacts on employment. Business rights protection is another focus area for markets looking to welcome major technology brands for the first time.”

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Brexit will have major impact on UK-EU electricity flows

23 April 2019 Consultancy.uk

Brexit could have a major impact on the consumer price of electricity in the UK, according to an analysis by Sia Partners. The total costs for UK society could swell to €600 million annually due to less efficient flows of electricity.

As the Brexit process has perpetually stalled, with no realistic end in sight now until Halloween, underprepared businesses have been handed a lifeline. The scramble to prepare for a No Deal scenario can now continue for another half-a-year, and one of the key factors which companies will need to consider when drawing up these plans is the cost of accessing utilities post-Brexit. In the digital age, virtually no business can survive without a ready supply of electricity – while the pay-cheques of staff will also need to inflate to accommodate future rises in bills.

With significant cross-border flows of electricity between continental Europe and the UK, Brexit is destined to have a major impact on individuals and companies in this manner, according to new analysis by consulting firm Sia Partners. These flows of electricity are governed by common European rules, but when the UK leaves EU, Britain’s electricity markets will no longer be integrated into Europe’s ‘Internal Energy Market’.

European model

Historically, electricity grids and markets were developed on a national level. However, years ago the EU set out to achieve integration in electricity grids, on the premise that coupling grids and markets can lead to significant benefits. By making electricity flows possible, price arbitrage can be faded out by allowing buyers to access cheaper prices offered beyond the country’s own borders, driving up competition and lowering average prices.

Brexit will have major impact on UK-EU electricity flows

An analysis of electricity flows between the UK and Ireland demonstrates this. Before Ireland was coupled to the UK, commercial electricity exchanges on the UK - Ireland border flowed 40% of the time against the natural direction, i.e. from the higher to the lower price market. After more effective cooperation and regulation was put into place ('After the I-SEM' went live), the picture changed drastically, with commercial flows now following the price differential 96% of the time. Quantifying this welfare benefit is not easy: according to one estimate by ACER, the economic added value of having market coupling with implicit capacity allocation on the GB-Ireland border (1GW) amounts to around €110 million annually.

Europe’s aim is to achieve interconnection of at least 10% of their installed electricity production capacity by 2020. As it stands, seventeen countries are on track to reach that target by 2020, or have already reached it.

On the UK side, the region currently has a total capacity of around 5GW connected with mainland Europe (France, the Netherlands, Ireland, Belgium), corresponding to roughly 5% of UK’s installed capacity. In comparison with other EU countries, this ratio is on the low end; however, the UK is playing catch-up and has 10 interconnections scheduled for commissioning in the next four years.

Brexit

It's clear that the UK’s withdrawal from the EU will have an impact on electricity markets co-operation. The question which remains is how large will the impact will be? To provide a forecast for this, analysts at Sia Partners ran a modelling exercise with two scenarios in mind. After leaving the European bloc, the UK will have to make agreements with European countries, similar to how Switzerland and Norway currently operate. Norway has a deal with a relatively high level of integration with the EU’s internal energy market, while Switzerland stands at the other end of the spectrum, with the country excluded from several market coupling initiatives (e.g. MRC, XBID) and from implicit capacity allocation with any other EU member state.

“If Brexit leads to a construction which is similar to the Swiss deal, where UK’s electricity borders are uncoupled from its neighbouring countries, then there will be a major loss of welfare.”
– Sia Partners

If the UK follows in the footsteps of Norway, then the consequences of Brexit could be muted. According to Sia Partners’ calculations, the economic loss would be minimised in the mid-term, with only operational challenges expected. For example, the implementation of pan-European projects, such as XBID, could run into delays in the UK. The EU currently has 7 of such interconnection projects scheduled for completion before 2022.

“In case a Norwegian style deal is struck, the UK will lose its decision power related to EU energy policy but it would allow keeping the benefits linked to the internal energy market not only for itself but also for Ireland and continental Europe,” the researchers state.

If, however, a Swiss deal is struck, then the projected costs could range between €500 million to €1 billion. An expected 60% of this loss will be borne by the UK, 16% by France, and 8% by Belgium, the isle of Ireland and the Netherlands. The researchers concluded that if Brexit leads to a construction which is similar to the Swiss deal, where UK’s electricity borders are uncoupled from its neighbouring countries, “then there will be a major loss of welfare.”