UK economy suffers contraction ahead of Brexit

13 February 2019 Consultancy.uk

As the UK prepares for the culmination of a traumatic divorce from the continent, the nation’s economy has suffered a dramatic contraction. While the UK’s service economy – including management consultancies –continues to enjoy solid growth, according to the Office for National Statistics, the wider country experienced a significant slowdown during the winter of 2018, as overall growth for the year fell to its lowest since 2012.

In 2012, the UK economy grew by 1.4%. At the time, the country was recovering from slipping into a state of recession – defined as two consecutive quarters of contraction – at the start of the year, having shrunk by 0.2% in the first three months of 2012. The Office for National Statistics (ONS) said at the time that a fall in construction output was behind the surprise contraction. At the same time, wage growth had been suppressed, causing consumer confidence to crash, resulting in a sustained period of trouble for the UK’s retail sector, too, with noted high street brands such as HMV collapsing into administration in the process.

Six years later, the ONS has shown the UK’s growth has once more flat-lined at a level of 1.4%, this time due to a contraction at the end of 2018. In the process, the retail sector is floundering, HMV has once again collapsed into administration, demand in the construction sector has suffered, and wages remain substantially lower in real terms than before the Great Recession. The only thing preventing economists from suffering a severe case of déjà vu at this moment is that much worse could still be to come, with Brexit on the horizon.UK economy suffers contraction ahead of Brexit

Of the greatest concern from the ONS’ will be a contraction for December alone, with the economy shrinking by 0.4%. UK economic growth eased to just 0.2% in the final quarter of 2018, a significant slowdown on the 0.6% achieved between July and September. While this is still in line with economists' forecasts, and this is a long way from constituting a full-blown recession, with so much economic uncertainty on the cards for the rest of 2019, the UK’s economy is in a precarious position. Indeed, the last time that the economy performed any worse than this was in 2009, when it contracted by 4.2%.

Commenting on the findings, Rob Kent-Smith, the ONS’ Head of GDP, said, "GDP slowed in the last three months of the year with the manufacturing of cars and steel products seeing steep falls and construction also declining. However, services continued to grow, with the health sector, management consultants and IT all doing well.”

While the seemingly bulletproof nature of the professional services sphere might give the consulting industry cause for celebration, however, it could also serve as a grim omen for other sectors in the near future. When output falls, firms need consultants to help them restructure and cut costs. This means a spike in consulting demand has sometimes been seen as an indicator of a possible recession, with consultants often the first port of call for companies looking to turn their fortunes around.

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Brexit will have major impact on UK-EU electricity flows

22 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.”