The 2022-23 Economic Crisis Megathread

[Sheilbh]

It's difficult to talk about the actual consequences or get people to take them seriously, when many people blame it for literally everything (I think the Brexit cause Putin's invasion of Ukraine was possibly my favourite) and think if you don't blame everything on it there's a conspiracy/omerta

[Josquius]

It's difficult to talk about the actual consequences or get people to take them seriously, when many people blame it for literally everything (I think the Brexit cause Putin's invasion of Ukraine was possibly my favourite) and think if you don't blame everything on it there's a conspiracy/omerta

Nothing has a single cause.
Brexit definitely was a factor in increasingly Putins likely hood of invading Ukraine along with the trump election and many other things. It helped him to believe the west was a disunited mess that would just let him do what he wants.

Likewise with the current shortages. Very weird they aren't happening in France and this isn't the first time Spain has had crops ruined.

[Zanza]

There is a vegetable and fruit shortage? 

[Sheilbh]

Nothing has a single cause.
Brexit definitely was a factor in increasingly Putins likely hood of invading Ukraine along with the trump election and many other things. It helped him to believe the west was a disunited mess that would just let him do what he wants.

We just aren't that important

Likewise with the current shortages. Very weird they aren't happening in France and this isn't the first time Spain has had crops ruined.

It's an energy, supply chain and climate story. I think, unlike Brexit, energy and climate are key in every economics/business story in the UK and Europe at the minute.

Here's a thread by Ed Conway from July about this:
https://twitter.com/EdConwaySky/status/1527926798104809473

Basically tomatoes - and other salad produce - are fossil fuel products. We produce about 20% of what we consume (largely in the summer and autumn) and the Netherlands does another big chunk. But we don't naturally have the climate for it. We're able to produce it in massive greenhouses with huge natural gas heating, fertiliser (produced by gas) and CO2 pumps into the greenhouse (which are obviously also powered). They are very resource intensive when produced locally (one of the reasons I'm really dubious about "food miles").

Because of the price of gas, energy and fertiliser following Russia's invasion, UK greenhouses stopped producing because the loss they would make on just paying for empty greenhouses was lower than the loss they'd make actually producing produce. They stopped producing last year - and according to the FT in autumn they're not planning to plant for this year either. There are similar factors in the Netherlands which is impacting their production. You can see this in the way EU supply chains have pivoted to importing tomatoes since the war:


The other bit is British supermarkets. They are the masters of "just-in-time" supply chains, as well as really aggressive contracts with their suppliers. The UK has some of the cheapest food in Europe because the supermarkets are always massively competing with each other on price and all, generally, absolutely rinse their producers (but consumers win) - the balance in other bits of Europe is different. They pay more for their food - producers earn more and are more protected.

The other reason supermarkets are so good at getting the cheapest deal for consumers and supply chains is that they're fairly consolidated in suppliers. So of the 80% of tomatoes etc that we import, 90% comes from the Netherlands (facing similar issues), Spain and Morocco which are having those issues. The problem with that is it's difficult to suddenly pivot to new suppliers especially when cost is a big issue and everyone else is also looking to import more. So again you can see there's a slow trend to more imports that swings upwards since 2020 when energy costs start climbing (also the seasonality) and the UK relying more on imports - but the supermarket supply chains are fully based on producers in three countries:


EU countries differ by country but in general the EU has a vastly more fragmented/diverse supply chain - Turkey, other bits of North Africa, the Balkans and even West Africa etc all chip in for about one third to half of the EU's tomato imports, Turkey in particular has become a key supplier.

The core of the story is one of (to nick DG's phrase) brittle supply chains that in benign times successfully delivered very low costs for consumers, now breaking down in the face of external factors (particularly energy and fertiliser) and climate events. I think on its own right, it's an interesting story because it is indicative, I think, of the economic world we're now operating in. Brexit is probably having an additional impact on top of that but I think, as is normally the case, Brexit mainly just aggravates/mitigates an issuue rather than being a cause.

[Tamas]

There is a vegetable and fruit shortage? 

Yes. It is everywhere, because Brexit isn't its cause.

[grumbler]

This veg shortage in the UK is clearly the result of Brexit going into effect last month.  There have been no changes in the UK other than Brexit.

I reckon it will take two years after implementation before people stop blaming all of their problems on Brexit.

[Josquius]

We just aren't that important

I wouldn't undersell the UK.
We are seen as fairly important to Russia. We were also one of the leading members of the EU, one that often aligned itself with eastern members.

It's an energy, supply chain and climate story. I think, unlike Brexit, energy and climate are key in every economics/business story in the UK and Europe at the minute.

Here's a thread by Ed Conway from July about this:
https://twitter.com/EdConwaySky/status/1527926798104809473

Basically tomatoes - and other salad produce - are fossil fuel products. We produce about 20% of what we consume (largely in the summer and autumn) and the Netherlands does another big chunk. But we don't naturally have the climate for it. We're able to produce it in massive greenhouses with huge natural gas heating, fertiliser (produced by gas) and CO2 pumps into the greenhouse (which are obviously also powered). They are very resource intensive when produced locally (one of the reasons I'm really dubious about "food miles").

Because of the price of gas, energy and fertiliser following Russia's invasion, UK greenhouses stopped producing because the loss they would make on just paying for empty greenhouses was lower than the loss they'd make actually producing produce. They stopped producing last year - and according to the FT in autumn they're not planning to plant for this year either. There are similar factors in the Netherlands which is impacting their production. You can see this in the way EU supply chains have pivoted to importing tomatoes since the war:


The other bit is British supermarkets. They are the masters of "just-in-time" supply chains, as well as really aggressive contracts with their suppliers. The UK has some of the cheapest food in Europe because the supermarkets are always massively competing with each other on price and all, generally, absolutely rinse their producers (but consumers win) - the balance in other bits of Europe is different. They pay more for their food - producers earn more and are more protected.

The other reason supermarkets are so good at getting the cheapest deal for consumers and supply chains is that they're fairly consolidated in suppliers. So of the 80% of tomatoes etc that we import, 90% comes from the Netherlands (facing similar issues), Spain and Morocco which are having those issues. The problem with that is it's difficult to suddenly pivot to new suppliers especially when cost is a big issue and everyone else is also looking to import more. So again you can see there's a slow trend to more imports that swings upwards since 2020 when energy costs start climbing (also the seasonality) and the UK relying more on imports - but the supermarket supply chains are fully based on producers in three countries:


EU countries differ by country but in general the EU has a vastly more fragmented/diverse supply chain - Turkey, other bits of North Africa, the Balkans and even West Africa etc all chip in for about one third to half of the EU's tomato imports, Turkey in particular has become a key supplier.

The core of the story is one of (to nick DG's phrase) brittle supply chains that in benign times successfully delivered very low costs for consumers, now breaking down in the face of external factors (particularly energy and fertiliser) and climate events. I think on its own right, it's an interesting story because it is indicative, I think, of the economic world we're now operating in. Brexit is probably having an additional impact on top of that but I think, as is normally the case, Brexit mainly just aggravates/mitigates an issuue rather than being a cause.

Energy is one issue where the brexit impact is fairly minimal, with it instead being other British government mistakes to blame. But this issue feeds into another which is heavily reliant on brexit- British farming is a mess, the government has not replaced EU funding and domestic farmers are producing record lows.
Supply chains are brittle? - this is a huge brexit related issue.

Most things have multiple causes. Everything is interlinked. And the key puncture in the UK economy which is fucking up everything and leading to further damage down the line is brexit. Issues which previously would have caused a bit of stress at supermarket HQs but weren't really seen by the public are thanks to brexit being pushed over the top to where they're impacting peoples lives.

[Sheilbh]

Energy is one issue where the brexit impact is fairly minimal, with it instead being other British government mistakes to blame. But this issue feeds into another which is heavily reliant on brexit- British farming is a mess, the government has not replaced EU funding and domestic farmers are producing record lows.

The government has announced the new subsidy regime which is "Environmental Land Management Subsidies" rather than linked to production - and it looks pretty good to me.

Domestic farmers aren't producing record lows. Agriculture is one of the only areas where I think there is genuine British exceptionalism because of empire (and informal empire - particularly Latin America). We now produce about 50% of our food and it's bounced around 50-60% since we joined the EU, because the EU is good at protecting domestic farmers. But for about 150 years before joining the EU we were importing 70%+ of food. So historically we're still producing and consuming more of our own food since the early 19th/late 18th century.

I go back and forth on this all the time. I'm not sure if the right approach is what Truss wanted which is more like the EU and focusing subsidies on production, or the Johnson/Sunak approach which is more about subsidising environmental and carbon use of land. Regardless though I really don't think we should be subsidising the massive, resource intensive, fossil fuel produced veg like tomatoes or cucumbers in the UK (or Netherlands).

Supply chains are brittle? - this is a huge brexit related issue.

How? The issue here isn't customs or border related issues. It's that UK supermarkets got the vast majority of produce from four countries - two (UK and Netherlands) aren't economical any more and the other two (Spain and Morocco) are having climate related issues in their production. I don't see how Brexit relates to that or to their ability to pivot quickly to another supplier.

I think it's another example where the UK went further than most countries in that purely market driven system that really delivered for consumers in benign times because it resulted in lower prices through efficiency and consolidation - often at the cost of producers and labour. I think that model is actually part of what drove the Brexit vote, but also leaves us particularly exposed to any shocks - and as I say I think we're entering a period when there are going to be shocks.

Most things have multiple causes. Everything is interlinked. And the key puncture in the UK economy which is fucking up everything and leading to further damage down the line is brexit. Issues which previously would have caused a bit of stress at supermarket HQs but weren't really seen by the public are thanks to brexit being pushed over the top to where they're impacting peoples lives.

There are sectors where things have gone wrong and the cause is Brexit - for example car manufacturing which has been wiped out by Brexit.

But I didn't think economics correspondents and the BofE etc were engaged in a conspiracy to downplay the benefits of Brexit in 2016 - when they were saying it would have a negative impact on the economy. I don't think there's now a conspiracy of silence or omerta by economics correspondents and the BofE to downplay the impact of Brexit.

So when they say a story isn't because of Brexit, I think they're probably right and not lying/covering it up. The BofE said before Brexit that they think over the 15 years, it'll cause growth to be about 4% lower than it would otherwise have been - with the hit being bigger in the near term. They recently updated and said they have no reason to change that assessment and the evidence from the economy is that's what's happening. But it is a really diffuse problem across many sectors - there's some that are really badly hit (like car manufacturing) but otherwise it's just an extra bit of drag. It's not a car crash but a puncture.

I think the bigger issue from a UK perspective is not that Brexit is going to reduce growth by about 0.25% a year - but why 0.25% growth a year matters so much. Basically why is our growth so chronically low otherwise. I think part of that is, as I bang on about (), productivity and investment. But it's also because I think the UK's model for the last 40 years was a relatively open, relatively liberal service based economy - which I think is still right - that had a particular niche in financial services and oil and gas where, for both, it was the European hub.

The financial crisis killed that model and Brexit dumped it in the sea. I think this is a risk for the re-join side is that even if we had a time machine and could undo Brexit, or re-join tomorrow, I don't think it would solve the issues in our economy. We've incredibly low productivity which hasn't really grown since 2008, we have decades of under-investment and our economic model for the last forty years doesn't work anymore. And I think the British model of being relatively open and relatively liberal as well as market-driven is particularly exposed as I think globally the conditions that created that model aren't there any more.

[Josquius]

The government has announced the new subsidy regime which is "Environmental Land Management Subsidies" rather than linked to production - and it looks pretty good to me.

Domestic farmers aren't producing record lows. Agriculture is one of the only areas where I think there is genuine British exceptionalism because of empire (and informal empire - particularly Latin America). We now produce about 50% of our food and it's bounced around 50-60% since we joined the EU, because the EU is good at protecting domestic farmers. But for about 150 years before joining the EU we were importing 70%+ of food. So historically we're still producing and consuming more of our own food since the early 19th/late 18th century.

I go back and forth on this all the time. I'm not sure if the right approach is what Truss wanted which is more like the EU and focusing subsidies on production, or the Johnson/Sunak approach which is more about subsidising environmental and carbon use of land.

I'm not a farmer, but all I have heard from that sector is pretty annoyed at the dropping support (one easy pop-source of this, Jeremy Clarkson in series 2 of his farm series).
The government has talked a lot about new support but a big issue is that farming involves a lot of pre-planning for seasons ahead. There was (still is I think?) a huge gap between brexit and anything been done.

And OK. On the grand historic scale we're still doing OK nationally in terms of output. I mean we're at lows looking at recent comparable years. Things are still a bit distorted by covid it could be argued so it is a bit too early to try and try a definite quantitive conclusions. There are signs of notable drops across most agricultural products from the years leading up to 2019.

What the right long term approach is I really have no idea. But what I do know for sure is the cliff edge approach that was followed was absolutely wrong. Any fundamental change in subsidies needs to be a gradual process.

Regardless though I really don't think we should be subsidising the massive, resource intensive, fossil fuel produced veg like tomatoes or cucumbers in the UK (or Netherlands).

CO2 is bad of course. But put this against this food security and the CO2 of transport and I've no idea where the balance lies.

How? The issue here isn't customs or border related issues. It's that UK supermarkets got the vast majority of produce from four countries - two (UK and Netherlands) aren't economical any more and the other two (Spain and Morocco) are having climate related issues in their production. I don't see how Brexit relates to that or to their ability to pivot quickly to another supplier.

Anything coming from abroad is a customs/border related issue. Its simply taking far longer and becoming far more unreliable to get lorries back and forth across the border.
Additionally, though its slackening off compared to last year, the removal of the UK from the EU lorry driver pool has caused a massive shortage in the industry. This hasn't been completely fixed.
A lack of ability to be flexible is a key factor brexit has introduced to the UK economy.

[The Minsky Moment]

Well, one problem a few people have been mentioning is that with all the QE etc since 2008, economic growth have been.. kind of meagre? I think the UK has managed what 1% or so? If that's true, how are things will look if we end the era of free money?

Growth in the US has been quite strong even as the Fed has brought up rates.  Central bank actions are usually reactionary so you have to look at the causal arrow from both ends.  QE is a response to poor demand conditions so it shouldn't be surprising if monetary easing and weak GDP numbers appear correlated.

[The Minsky Moment]

I wonder if there is an argument for a policy that deliberately makes things less brittle, even at the expense of some economic efficiency.  Free market forces seem ill-equipped to properly manage extreme tail risks or contagion risks.  If all your competitors get their stuff made in China, it would be hard to stay in business if you don't follow suit, but then the entire sector's fortunes hang on the trade routes functioning as intended.

This is true to an extent, but even without the "tight" supply chains of the pre-COVID era, I think the economic effects of COVID would play out pretty close to what happened because the disruption was so significant and pervasive.  The argument could be made that the world economy operated quite well and responded flexibly under the very difficult circumstances posed.

I do think that policy is reorienting around building in buffers and redundancy, but more driven by national security concerns than economic policy. 

[Sheilbh]

I'm not a farmer, but all I have heard from that sector is pretty annoyed at the dropping support (one easy pop-source of this, Jeremy Clarkson in series 2 of his farm series).

I haven't watched that - but I'm definitely going to since I've heard that NIMBYs are the antagonist

I never thought I'd end up cheering Jeremy Clarkson on - but here we are

The government has talked a lot about new support but a big issue is that farming involves a lot of pre-planning for seasons ahead. There was (still is I think?) a huge gap between brexit and anything been done.

Yeah the scheme's been in consultation for four years and has now been formally announced and will be introduced over the next year or so - I thin it's actually a good example of what Britain can do in areas post-Brexit. But it's boring, slow, long, technical work and in the meantime they just rolled over existing subsidies. It doesn't give Brexiters the libidinal thrill of overthrowing Brussels - but is the right approach.

And OK. On the grand historic scale we're still doing OK nationally in terms of output. I mean we're at lows looking at recent comparable years. Things are still a bit distorted by covid it could be argued so it is a bit too early to try and try a definite quantitive conclusions. There are signs of notable drops across most agricultural products from the years leading up to 2019.

I don't really think there's an okay or an optimal level of national agricultural output. I find the switch for die-hard Thatcherites like John Redwood into Bennite autarkists wanting us to be self-sustainable in agriculture a bit weird to be honest. And vice versa.

My view is you probably need some form of subsidy for land management and you set a framework of how to do that (whether by carbon/environmental standards or production) - but aside from that you let the market operate. I don't see any reason to protect or otherwise boost local producers. (Although, it must be said, I am instinctively anti-rural )

What the right long term approach is I really have no idea. But what I do know for sure is the cliff edge approach that was followed was absolutely wrong. Any fundamental change in subsidies needs to be a gradual process.

But there wasn't. There was a long consultation period - with various iterations over several years, the new scheme has been broadly welcomed by the NFU and environmental groups with some quibbles (basically, like CAP, it will still primarily benefit large arable farmers over small pastoral farmers; and it could be more environmentally focused) and it will now be phased in over several years. There isn't a cliff edge.

Anything coming from abroad is a customs/border related issue. Its simply taking far longer and becoming far more unreliable to get lorries back and forth across the border.
Additionally, though its slackening off compared to last year, the removal of the UK from the EU lorry driver pool has caused a massive shortage in the industry. This hasn't been completely fixed.
A lack of ability to be flexible is a key factor brexit has introduced to the UK economy.

But literally none of those are being reported or even mentioned by industry figures as part of the problem. The closest I can see to Brexit from industry is this from the Guardian. As I say it could be a conspiracy theory for every economics correspondent in every news outlet regardless of their politics to downplay Brexit - or it could be that it's not always the cause:

What is behind the shortages?

Certain fresh vegetables and fruits are hard to come by in the UK as a result of an unfortunate combination of poor weather reducing the harvest in Europe and north Africa, as well lower supplies from UK and Dutch producers hit by the jump in energy bills to heat glasshouses.

At this time of year, Britain relies on Spain, Morocco, Tunisia and Egypt for the bulk of salad imports. However, these crops have been affected by unusually cold weather last month, including intense night frosts, while tomato plants have also been damaged or killed by disease – in particular the tomato brown rugose virus.

Meanwhile, Britain and other northern European countries – particularly the Netherlands which is a big vegetable producer – have reduced how many crops they have planted over the winter, after the Ukraine war sent bills soaring for the energy required to light and heat greenhouses and the cost of the fertiliser used on plants.

Faced with higher costs for glasshouse crops, some retailers chose to rely more heavily this year on sourcing from Spain and north Africa, leaving them more vulnerable to the weather-triggered shortages.

Are things worse in the UK than the rest of Europe?

It seems so. There are no reports of shortages in France and Germany and European shoppers have shared photos on social media of full supermarket shelves, in stark contrast to British supermarkets.

One issue is reduced output from British farms. The president of the National Farmers' Union (NFU), Minette Batters, told the union's annual conference on Tuesday that "domestic production of salad, including cucumbers and tomatoes, has fallen to its lowest level since records began in 1985".

In the UK, a cold snap and frost before Christmas also damaged field crops including cauliflower, cabbage and carrots.

Batters has warned there might be further rationing of salad items to come, especially if growers' energy bills remain high.

With many British tomato and salad growers having chosen to delaying planting in recent months because of economic uncertainty, UK production will not be able to pick up the slack for several weeks, and will probably begin later than in a normal year.

As a result, demand for Spanish and Moroccan produce to fill the gap has outstripped supply, and retailers cannot access as much food as they need, or face paying significantly higher prices for what is available.

So is Brexit to blame?

Most farmers and suppliers have said they do not believe the UK's exit from the EU is the main reason for the UK's empty supermarket shelves. However, many acknowledge that Brexit – as well as the pandemic – have increased costs for growers, mostly as a result of having to pay higher wages to workers amid labour shortages.

Some importers argue the additional costs and bureaucracy created by Brexit have put the UK at the back of queue for supplies from European producers when crops are in short supply across the continent. It has also led to higher costs and paperwork, which can cause delays at the border – a particular issue with perishable produce.

I'm not sure I really buy the "back of the queue" line, or I think that's really an issue of cost - and they're saying it "can" cause border issues but that's not the problem.

My view is that supermarkets are 95% of food retail in this country. They have huge leverage and power in dealing with their suppliers, and this is an industry that has been very aggressive and, I'd argue, predatory towards its suppliers in creating efficiencies and squeezing their supply chain (which benefited consumers). They are now reaping the consequences of those practices when their suppliers have issues and no-one else wants to do business on their terms. If you need to move to a Turkish supplier - where they'll already have contracts with existing customers, you probably need to pay a premium as well as a Brexit premium.

I saw Sainsibury's CEO this morning arguing that the UK needed to provide more money for energy intensive farmers in the UK as well as throwing in  line about Brexit. I think it's special pleading for the state to pay the costs of their suppliers so they don't have to move on price. There may be an argument for providing support to those farmers (personally I'm dubious) but it should be justified on its own terms not because Sainsbury's doesn't like the power in their relationship shifting to producers.

[Grey Fox]

I've watched first 3 episodes Clarkson's Farm season 2 and like the 1st one, it encapsulate so very well all the issues you Brits have talked about over the years.

NIMBY, excessive red tape, no plan, no ultimate authority, poor roads, excessive love for small towns, etc.

[Tamas]

UK consumer credit stat is WAY over estimates. I assume if this was a seasonal thing then the forecast (which is not included here but was at 0.5B) would have accounted for it, so probably an indication of inflation not cooling off:

The latest Bank of England figures show sharp declines in mortgage approvals and lending in January, as the housing market continues to slow.

There was also a hefty rise in consumer credit, as people borrowed more on credit cards, loans etc as they struggled with soaring food and energy bills.

Net mortgage lending to individuals decreased from £3.1bn to £2.5bn in January.
Net mortgage approvals for house purchases decreased to 39,600 in January from 40,500 in December, marked the fifth consecutive monthly decrease in mortgage approvals. If the onset of the Covid-19 pandemic and period immediately thereafter is excluded (when the housing market ground to a halt), this was the lowest approvals since January 2009 (32,400).
The 'effective' interest rate – the actual interest rate paid – on newly drawn mortgages increased by 21 basis points, to 3.88% in January.
Consumers borrowed an additional £1.6bn in consumer credit, compared with £800m borrowed in December. This was split between £1.1bn of borrowing on credit cards and £500m of borrowing through other forms of consumer credit.

[Sheilbh]

Yeah, you can see the seasonally adjusted versions on the BofE site (useful charts):
https://www.bankofengland.co.uk/statistics/money-and-credit/2022/december-2022