Breaking our (supply) chains

UK business investment is grim. It is only 5% up on pre-financial crisis levels, while we would expect to see an increase of over 30% at this stage.

Two-thirds of EU businesses with UK suppliers are going to drop them and change to EU suppliers due to Brexit. 40% of UK businesses will replace their EU suppliers with UK ones. It isn't just tariffs that are the problem - it is also VAT. After Brexit, UK businesses will have to pay VAT on EU imports up front, with enormous cash flow implications. Many UK businesses expect to terminate any EU sales operation they have, in order to avoid the red tape that soon will be involved.

The UK car industry isn't doing so well either. This year's 12% drop in UK car sales has hit UK manufacturers hardest, with production down 14%. Post-Brexit they may have even bigger worries. A hard Brexit will mean high tariffs, but the industry relies on complex supply chains where components are moved between continental Europe and the UK numerous times. If we don't have a trade agreement then at each crossing they will have a levy imposed of up to 10%. This would make production in Britain uneconomic.

Even imported cars will suffer. Imported German vehicles will have a 10% tariff imposed under WTO rules. We buy a million of them a year. Post-Brexit prices will be around £1,500 higher while choice will be reduced as overseas makers don't bother to certify their vehicles in the UK.

Overseas investment in the UK is still strong, with the 10% drop in sterling making every rouble or dollar go further. Already 200 UK businesses have been bought out by foreign investors. However the rise in overseas investment in the rest of Europe was double that in the UK (14% up compared to 7%), and investor sentiments are changing as they see Britain becoming less attractive on a series of fronts including education, infrastructure, skills, political stability, and - of course - access to the EU.

Our own research and development spending is also low compared to the EU average - successful countries such as Germany spend almost 3% of GDP on R&D. We spend half that.

R&D investment correlates strongly with productivity growth, so it is no surprise that the UK has poor productivity. Even worse, if we are going to be relying on exports then we need to be making stuff people want to buy at prices they can afford, and we need access to their markets.

The transition deal is vital, but industry needs to look beyond it, readying itself for the final divorce and the hard times ahead.