There's a counterintuitive argument that preparations for a nightmare Brexit will actually be good for the UK economy

  • Companies have started stockpiling goods to safeguard against the possibility a disruptive no deal Brexit.
  • Samuel Tombs, the chief UK economist at Pantheon Macroeconomics, says clients have asked him if the stockpiling of goods could actually give a short-term boost to the economy.
  • Tombs is unconvinced and outlines four reasons why company stockpiles are unlikely to help UK growth.

LONDON – With the odd exception, the vast majority of economists covering Britain are agreed on one thing – that a disorderly,“no deal” Brexit will be bad news for the British economy.

However, one of the UK’s top economic research houses said clients are asking about a counterintuitive argument that a no deal outcome could actually be good for the economy.

“We have been asked several times in recent days whether a pick-up in stockbuilding, as part of businesses’ contingency planning for a no-deal Brexit, could cause the economy to gather some pace in the run-up to Britain’s scheduled departure from the EU in March 2019,” Samuel Tombs, the chief UK economist at Pantheon Macroeconomics wrote to clients on Tuesday, without specifying who the clients were.

The argument, at its most basic level, businesses will start stockpiling goods in preparation for the possibility that trade will be disrupted by a “no deal” Brexit. This, in turn, could give the British economy a short-lived boost as companies invest heavily in stock over a short period of time.

Tombs noted that some firms already announced plans to increase stock levels.

“AstraZeneca, for instance, plans to increase its stocks of medicine in the UK by 20%, while competitor Sanofi expects to increase its inventory so that it could meet demand for 14 weeks, up from 10 weeks at present,” Tombs wrote.

“The NHS also has decided to build-up its reserves of medicines. Meanwhile, Airbus warned earlier this year that it would need to accumulate more inventory soon if a no-deal Brexit remained a risk.”

Over the course of history, incidents of stockpiling have ended up boosting economies. As Tombs notes, it “often makes large contributions to quarter-on-quarter GDP.”

Screen Shot 2018 08 21 at 14.46.12Pantheon Macroeconomics

But Tombs is unconvinced by this argument. Imports, by their very nature, see money leave the economy, as goods are being brought from overseas. Therefore, increasing stockpiles of foreign-produced goods will not help GDP at all.

In the past, stockpiling GDP boosts have largely come from the hoarding of British-made goods but Tombes pointed out: “In most cases, domestically-produced alternatives are not available for the goods that British firms already import.” If they were, there would be no need for firms to stockpile to guard against “no deal.”

Tombs’ also believes that any instances of stockpiling will be relatively limited due to cost and capacity issues.

Most British firms rely on so-called just-in-time (JIT) arrangements, whereby goods are delivered just as they are to be stocked in shops, rather than being held in warehouses beforehand. A highly efficient system has developed around this and, as a result, surplus warehouse capacity is limited.

“The vacancy rate in the warehousing sector has continued to fall over the last year and is at record lows,” Tombs noted.

Cost is also a major issue. Tombs argued that companies are unlikely to want to engage in high levels of spending just before the likely economic shock of a no deal outcome.

“Increasing stock levels to cover three weeks of demand instead of three days [would] lead to a seven-fold increase in the required amount of working capital,” he wrote.

Finally, Tombs added that: “The boost to inventory levels from expectations that supply chains will break down will be offset, at least partly, by expectations that customer demand will be weaker after a no-deal Brexit.”

In short, even if stockpiling does lead to higher growth in the very short term, any boost will likely be offset by a slow down in consumer spending in the event of “no deal.”

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