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Analysis

‘I don’t think the PM knows’: Boris Johnson and the Brexit endgame

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At 9pm on Wednesday November 11, a grey-faced Boris Johnson scurried past staffers in 10 Downing Street and into the office of David Frost, the man he has entrusted with trying to secure a trade deal with the EU. “The PM knew that David was unhappy — he thought he might resign,” says one of Mr Johnson’s aides. 

The Vote Leave group was breaking up. The Brexit hardliners who campaigned to take Britain out of the EU in 2016 and now sustained the prime minister in office had fallen out of favour. Dominic Cummings, the iconoclastic chief adviser, was among those ousted. A few minutes later, a relieved Mr Johnson returned to tell staff that Lord Frost, his pro-Brexit chief Europe adviser since July 2019, would not be walking out in sympathy.

Lord Frost, ennobled by Mr Johnson in June in recognition of his loyalty and tenacious negotiating style, tells colleagues he never intended to quit at such a key moment in trade talks and that the tactics have not changed. But the chaotic events of recent days in Downing Street have compounded a sense of bewilderment in European capitals, as diplomats try to work out what it all means for trade talks that are entering the endgame.

Are Mr Johnson and Lord Frost now ready to make compromises in the next few days to secure a trade deal with the EU — without having Mr Cummings’ favourite refrain “fuck ’em” ringing in their ears? Or will they double down to prove to Eurosceptics they are willing to embrace the hardest of all hard Brexits in the name of national sovereignty?

One senior official says: “To tell you the truth, we don’t know — and frankly, I don’t think the PM knows either.”

Dominic Cummings, the Brexit hardliner who campaigned to take Britain out of the EU in 2016, fell out of favour with the prime minister this month
Dominic Cummings, the Brexit hardliner who campaigned to take Britain out of the EU in 2016, fell out of favour with the prime minister this month © Henry Nicholls/Reuters

Talks are bogged down on questions of access to British fishing grounds, rules to maintain fair competition between the two sides and an enforcement mechanism for the deal. All impact on Mr Johnson’s quest to regain unfettered national sovereignty. With the transition period ending on December 31, British ministers are confident Mr Johnson will opt for a deal. But EU negotiators have come away from talks over the past few days doubting whether that decision has really yet been taken.

“It’s obvious there should be an agreement,” says one senior EU diplomat, before noting quickly that Mr Johnson does not always do what is obvious.

Johnson’s calculation 

Regardless of the eventual outcome, one thing is clear: the prime minister has already opted for what amounts to a hard Brexit. In his determination to break free of Brussels’ rules, he set out from the beginning to negotiate a standard free trade agreement, accepting that this would mean new frictions for trade in goods, and lost opportunities for providers of services.

Some Brexiters initially claimed the UK could remain in the EU single market, but they abandoned that idea when it became clear it would require the government to abide by Brussels rules. Theresa May split the difference in her July 2018 Chequers plan, an attempt to maintain access to the single market with minimal border friction under a “common rule book”; it was rejected by Eurosceptics as a capitulation and by EU leaders who saw it as “cherry picking”. When Mr Johnson became prime minister in July 2019 he opted for a much cleaner break.

An anti Brexit billboard on the border between Northern Ireland and the Republic of Ireland this month. Failure to secure a trade deal will create new tensions in the region
An anti Brexit billboard on the border between Northern Ireland and the Republic of Ireland this month. Failure to secure a trade deal will create new tensions in the region © Charles McQuillan/Getty

Business is already facing a mass of red tape on January 1 by virtue of Mr Johnson’s decision to leave the single market and customs union; that will still happen regardless of whether there is a trade deal.

A deal would provide for tariff-free trade on goods that qualify as EU or UK made, helping cushion the blow for sensitive sectors including automotive and agriculture. It would also include other measures to help trade flow — recognition of truckers’ permits for example. Most trade experts agree it would be better than nothing.

Ivan Rogers, Britain’s former ambassador to the EU, has long argued that “the delta” between leaving with a thin goods-only deal and leaving without a deal was so modest that Mr Johnson might find it politically easier to make a clean break with the EU, blaming intransigent Europeans for the chaos that looms in any event on January 1.

The most recent UK government estimates reckoned the UK would miss out on 4.9 per cent of future income over 15 years if it left the bloc with the kind of basic trade deal under discussion. Under a no-deal scenario, that hit would increase to 7.7 per cent over the same period, compared with staying in the EU. That difference is significant but perhaps not a clinching argument for Mr Johnson.

But other factors will weigh heavily on the prime minister. If he does not secure a deal — and Britain leaves on what he euphemistically calls “Australian” or World Trade Organization terms — it will not be the end of the story. Even Australia on the other side of the globe is negotiating a trade deal with Brussels; Britain at some point will want one too. Rather than turning a page on Brexit, the issue would dog his premiership.

Failure to secure a trade deal would create new tensions in Northern Ireland — which will remain covered by EU customs rules as part of the divorce deal Mr Johnson struck with the EU last year. Mr Johnson has threatened to renege on those commitments over fears about the impact of a trade border in the Irish Sea. But US president-elect Joe Biden twice warned Mr Johnson in a phone call this month not to let Brexit imperil the peace process in the region.

When Boris Johnson spoke to Joe Biden in a phone call this month, the US president-elect twice warned him not to let Brexit imperil the Northern Ireland peace process
When Boris Johnson spoke to Joe Biden in a phone call this month, the US president-elect twice warned him not to let Brexit imperil the Northern Ireland peace process © Andrew Parsons/No10 Downing Street

Gordon Brown, former prime minister, wondered this month if Mr Johnson really wanted to be “at war” with the EU and the US at the start of 2021, just when “Global Britain” takes over as head of the G7 and hosts the COP26 UN climate change conference. Trampling over international treaties and antagonising allies would be sharply at odds with the new Biden-led era.

Then there is the future unity of the UK. Successive opinion polls show that Scotland — which voted 62-38 to remain in the EU — now favours independence, with Brexit fuelling the grievance towards Mr Johnson and the government in Westminster. Michael Gove, Mr Johnson’s cabinet colleague, has been urging him to agree a deal if possible.

Finally there is the issue of competence. Mr Johnson has at times been overwhelmed during the Covid-19 crisis; failing to agree a trade deal, which Eurosceptics have claimed would be “the easiest in the world”, in the midst of a global pandemic would be a further blow to his chaotic premiership. The prime minister himself said in February that it was “very unlikely” that the talks with Brussels would not succeed.

“He needs a victory,” admits one Brexiter close to the prime minister.

that Scotland — which voted 62-38 to remain in the EU — now favours independence from the United Kingdom
Successive opinion polls show that Scotland — which voted 62-38 to remain in the EU — now favours independence from the United Kingdom © Jeff J Mitchell/Getty

On the ground

With less than six weeks to go until Britain’s transition period ends, some business leaders and hauliers have given up waiting for Mr Johnson to make up his mind and are preparing for major disruption. 

In Whitehall, preparations have included reconstituting the food industry resilience forum, which includes logisticians, port operators, hauliers and supermarket chains, with twice weekly calls to ensure food supplies are maintained if the ports become clogged. Fears that perishable food could run short have resurfaced.

Richard Burnett, head of the Road Haulage Association, says hauliers are now “resigned” to the fact that there would be disruptions on January 1 and would just have to manage as best they can.

Marc Payne, managing director of Plymouth-based Armoric Freight International, says that in the event of a ‘no deal’, where the EU and UK failed to recognise each other’s trucking permits, it is unclear whether he would get sufficient permits to drive into the EU.

Trucks queue in Kent last year during an exercise to prepare for the expected backlog of traffic after the imposition of customs checks on goods crossing the Channel
Trucks queue in Kent last year during an exercise to prepare for the expected backlog of traffic after the imposition of customs checks on goods crossing the Channel © Neil Hall/EPA-EFE

The imposition of customs and veterinary checks on goods crossing the Channel will soon become a fact of life, complete with the need for documentation, new arrangements for paying VAT, export authorisation numbers and, inevitably, truck queues. 

As new barriers appear, old freedoms will be lost. UK architects, doctors and other experts from regulated professions will no longer have automatic recognition of their qualifications across Europe — instead they will have to seek permission to work from authorities in individual EU countries. 

UK nationals will no longer have the same freedom of movement rights within the EU — relying instead on a visa-waiver programme that will allow them to spend up to 90 days in any 180-day period in the union’s border-free Schengen zone. Household animals will also lose the pet passport — their equivalent of EU citizenship.

Luisa Santos, chair of the EU-UK task force at employers’ organisation BusinessEurope, says disruption was inevitable but that no company could fully prepare for a no-deal outcome, with the potential jump in tariffs from zero to as much as 40 per cent for trade in goods.

Prime Minister Boris Johnson (centre), chief UK Brexit negotiator David Frost and Cabinet Office minister Michael Gove, negotiate with their EU counterparts during lockdown
Prime Minister Boris Johnson (centre), chief UK Brexit negotiator David Frost and Cabinet Office minister Michael Gove, negotiate with their EU counterparts during lockdown © Andrew Parsons/10 Downing Street

In addition to mitigating the blow of Brexit, a deal would be a platform that would allow for the relationship to deepen over time. “It will allow for us to continue to talk,” she says. “We are not going to be able to do everything in this deal.”

Given the economic and political self-harm that a “no deal” would inflict on Britain, it is perhaps a tribute to Lord Frost’s negotiating skills — and a reflection of Mr Johnson’s unpredictable style — that the EU27 has been left guessing until the last minute about the prime minister’s real intentions.

There is genuine nervousness on both sides of the negotiating table about what happens next, although both sides still hope to reach an agreement next week.

Manfred Weber, head of the European Parliament’s large centre-right grouping, warned on Thursday that the talks were running “out of time” given the need for any agreement to be ratified by the end of the year. 

Businesses around the continent are holding their breath.

Talks with the EU are bogged down on the question of access to British fishing grounds
Talks with the EU are bogged down on the question of access to British fishing grounds © Vickie Flores/EPA-EFE/Shutterstock



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Analysis

Signs of inflation emerge as Chinese producer prices leap

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For investors and governments eager to spot any sign of inflation as the global economy recovers from the coronavirus pandemic, Chinese factories are a good place to look.

The country this week released figures showing that the price of raw materials and goods leaving its factories rose 6.8 per cent year on year in April, its fastest pace of growth in more than three years.

For almost all of 2020, China’s producer price index was in negative territory as Covid-19 suppressed demand. The recent and sudden rise was partly driven by the comparison with a year earlier and, with consumer price rises still below 1 per cent, the overall inflation picture remained mixed.

But the data was nonetheless a sign of pockets of price increases emerging across China’s rapid recovery, where higher overall inflation is expected this year. It also reflected a global rally in commodity prices that has been supported by China’s voracious demand as well as hopes that other big economies will bounce back, too.

“A combination of China and external factors led to this PPI surge,” said Robin Xing, chief China economist at Morgan Stanley. “It’s like a perfect storm.”

Line chart of Producer Price index showing Producer prices in China rise at the fastest year-on-year pace since 2017

China’s PPI index is made up of prices of producer goods, such as wardrobes or washing machines, that factories sell to shops before they are sold on to consumers.

It also includes the prices of raw materials and commodities, such as coal, when they are sold from extraction companies to businesses that use them to make goods.

It was the latter that drove the recent surge in Chinese producer prices. Global commodity prices, which collapsed last year in the early stages of the pandemic, have since rebounded. Iron ore this week hit its highest level on record, while oil prices have recovered sharply from last year.

Xing estimated that 70 per cent of the April PPI increase was driven by commodities. That rally was also tied to China’s recovery, which has been backed by strong industrial growth and a construction boom that led to record output of steel last year.

As such, the data reflected both the pace of China’s recovery as well as a global commodity rally that it helped fuel and now extends beyond it.

For policymakers, one crucial question is whether higher producer prices will feed through to consumer prices. China’s consumer price index was just 0.9 per cent in April — its highest level in seven months, but far from a level that would generate immediate fears of broader inflation within China.

While economists expect a rise in CPI inflation in China this year, they suggested that any reaction from the People’s Bank of China to this week’s data was unlikely. The portion of the producer price index that represents the prices at which businesses buy consumer goods, as opposed to raw materials, was up only 0.3 per cent year on year.

Analysts at HSBC said transmission from PPI to CPI would be “limited”, allowing policymakers to remain “accommodative”.

Ting Lu, chief China economist at Nomura, forecast CPI inflation to rise to 2.8 per cent by the end of the year, with “pass-through” effects from PPI. But he suggested that the PBoC was unlikely to tighten in response to PPI, and that higher raw material prices instead posed a risk to Chinese demand and the wider recovery given controls on credit availability.

“For a typical borrower, $1bn six months ago may be enough to buy steel and cement to finish one project, but today it’s [maybe] not,” he said.

While the PBoC has not increased official rates since lowering them last year, the Chinese government has nonetheless tightened credit conditions over recent months.

It has also taken measures to rein in both its property sector, on concerns that easier money would encourage asset bubbles, and its steel sector, which has churned out the metal at a rate that threatens Beijing’s environmental commitments.

China’s gradual decarbonisation ambitions — and any production cuts they lead to within the country — are seen as constraints on supply, buoying the price of commodities further. 

Beyond raw materials, economists are closely watching other shortages. Iris Pang, chief economist for greater China at ING, said producer price inflation would be followed by chip inflation. A shortage of semiconductors, she said, was already beginning to drive price increases for consumer products such as washing machines and laptops.

Line chart of Per cent  showing Producer prices for consumer durables are gathering momentum this year

While the PPI index showed a much weaker increase in consumer goods than for raw materials, on a month-on-month basis there were notable rises. Durable consumer goods were up 0.4 per cent month on month in April, the fastest pace of growth since at least 2011, according to CEIC, a data company.

Apart from domestic construction, part of the demand for raw materials has been to drive the production of goods for export to western countries.

Data on Friday showed Chinese exports leapt 32.3 per cent year on year in April. But even when compared with April 2019, before the pandemic, the rise was about 16 per cent on an annualised basis, Morgan Stanley estimated.

Competition between producers in China meant this did not necessarily imply inflation for consumers overseas. Instead, China’s recent PPI jump hinted at just one of the global effects of western responses to the pandemic.

“If you try to figure out what is the end demand here for this PPI recovery, it is global stimulus,” said Xing. “External demand led to China’s export recovery, [and] now it’s far beyond its potential growth”.



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Analysis

Covid batters India’s aspiring middle classes

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When Ram Prakash died after a feverish and breathless week, his wife and 16-year-old daughter’s heartbreak was compounded by fear that the modest middle-class safety net he had knitted together might be ripped apart.

The 53-year-old, a tax adviser to local businesses, was one of the millions who had joined India’s fast-growing middle class in recent decades. Their rising incomes, better education and consumption powered one of the great global economic success stories.

But the calamitous second wave that claimed the life of Ram, the family’s breadwinner, has shattered the Prakashes’ hopes for the future. “Our life was going good but now it’s all over,” said Uma, his widow.

Economists warned that the latest outbreak could have long-term ramifications for middle-class Indians, whose rising consumption was expected to be the country’s growth engine for many years.

“India, at the end of the day, is a consumption story,” said Tanvee Gupta Jain, UBS chief India economist. “If you never recovered from the 2020 wave and then you go into the 2021 wave, then it’s a concern.”

India reported more than 320,000 Covid-19 infections and 3,800 deaths on Monday. Experts maintain that both figures are vastly undercounted.

The disease has heaped suffering on Indians irrespective of background. Yet this time, it has also hit hard an aspirational middle class whose newfound privilege previously helped shield them.

A lack of oxygen has been blamed for thousands of deaths © Sanjeev Verma/Hindustan Times via Getty

Public-health experts pointed to signs that after widespread infection among the urban poor last year, sectors of society including the comparatively affluent were more vulnerable this time round. This was compounded by the near-collapse of private health services on which they relied.

“You’re affluent but you can’t get a hospital bed. You’re affluent but you can’t get oxygen,” said Saurabh Mukherjea, founder of Marcellus Investment Managers. “That’s deeply disorientating.”

India’s middle class was already severely weakened by the recession that followed last year’s lockdown, even if they were better protected from the virus.

The Pew Research Center found that 32m people fell out of India’s middle class — defined as those earning between $10 and $20 a day — in 2020. That represented more than half of those added to the category since 2011.

Bar chart of Estimated change in number of people in each income tier due to the global recession (m) showing India’s poor grew while middle class shrank in 2020

India’s economy was expected to roar back before the second wave struck. For middle-class Indians on the brink, such as the Prakash family, this second shock may prove too much.

Ram, the tax consultant, had moved his family to a one-bedroom house in a humble New Delhi neighbourhood, bought a car and sent his daughter to a low-cost private school, hoping she could become a chartered accountant.

“He gave us so much when he was alive,” said Vasundhara, his daughter. “I only hope I will be able to continue my studies.”

Experts have debated what drove the high caseloads among middle class and rich Indians during the second wave.

Anup Malani, a professor at the University of Chicago, suggested that those populations proved more susceptible, especially as new variants spread.

In Mumbai, for example, studies last year found that about 50 per cent of slum residents had Covid-19 antibodies, compared with less than 20 per cent in more affluent surrounding neighbourhoods.

This is believed to have left the middle and upper classes more vulnerable, particularly to severe disease, researchers said. Doctors have reported similar trends elsewhere in India.

“The first wave largely infected poorer populations,” Malani and two co-authors wrote this month. The second wave “is disproportionately composed of individuals who are from non-slums”.

Bar chart of Estimated number of people in each income tier in 2020 before and after the global recession (m) showing The pandemic sets back growth of India’s middle class

Researchers said more data were needed but other susceptible populations could include those outside cities, such as in poor rural areas with shoddy healthcare where the virus was wreaking havoc.

The outbreak was so sudden that it overwhelmed even India’s best hospitals, including private facilities in cities such as Delhi or Bangalore.

Fewer than 1 per cent of Delhi’s 5,800 Covid-19 ICU beds are available, while crippling shortages of oxygen have contributed to countless deaths.

After Ram Prakash’s oxygen levels dropped, his family spent two frantic days ferrying him to six separate hospitals — both private and public — in a desperate bid to find treatment.

In the end, they brought him home. Ram died on April 27.

Uma and Vasundhara fear economic ruin. They have a shortfall of Rs30,000 ($408) to meet immediate expenses, including school fees and the mortgage on a neighbouring unit that Ram bought as an office.

“Right now our worry is just to survive, to get food and meet our daily expenses. But there won’t be enough,” said Vasundhara.

They plan to sell their car and Uma, a former Sanskrit teacher, wants to find work again. But they worry hopes of a better life are over.

“We had never imagined this could happen to us,” Vasundhara said. “We just can’t get our head around this.”



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Analysis

Reeves promotion underlines Labour shift to centre ground under Starmer

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When Sir Keir Starmer promoted Rachel Reeves to shadow chancellor late on Sunday night it emphasised his determination to defy the left of the Labour party and move in a more “centrist” direction after a series of disappointing local election results.

Reeves is unpopular with many “Corbynista” members — supporters of the party’s former hard left leader Jeremy Corbyn — because of comments she made in 2013 when she was shadow work and pensions secretary. That controversial moment saw her promise to be “tougher” than the ruling Tories on benefit costs.

Her role as vice-chair of Labour Friends of Israel is also contentious among many Corbyn supporters who oppose the actions of the Israeli government. And while other MPs agreed to serve on the Labour front bench under the Corbyn leadership in 2015, Reeves was one of a handful who refused to do so.

Starmer first considered making Reeves shadow chancellor when he became leader in April last year — only to drop the idea, fearing that it would prompt a backlash from left-wingers.

Yet it would be wrong to characterise the 42-year-old MP for Leeds West — a former junior chess champion — as a “Blairite” or “rightwinger” even in Labour terms.

Sir Keir Starmer promoted Rachel Reeves in a reshuffle of his front bench on Sunday © Stefan Rosseau/PA

During the last parliament she chaired the business select committee, a position she used to interrogate corporate failure by Carillion, the collapsed contractor. She meanwhile struck out as a writer, penning two books about female MPs.

In 2018, she used a speech in London’s East End to call for a new series of wealth taxes to raise more than £20bn a year — shifting the fiscal system from income to property. The then shadow chancellor John McDonnell resisted the idea, amid concerns over a backlash from middle class Labour voters.

Indeed, there was a moment in 2019 when some of Corbyn’s aides — including policy adviser Andrew Fisher — advocated bringing Reeves into the shadow cabinet.

Sharper edge but no shift in strategy

In the short-term her promotion to one of the most important roles in the shadow cabinet may give a sharper edge to Labour’s top team but not necessarily bring a shift in strategy.

That is because the party creates its election manifestos through a drawn-out process called the “national policy forum” over several years.

Starmer has eschewed creating new policies on the hoof in favour of a focus on rebranding, telling voters Labour is “under new management” after the electorally disastrous Corbyn, who lost two general elections in 2017 and 2019 — the latter by the biggest margin in nearly a century.

The opposition leader’s popularity rose last year as he forensically attacked the ruling Conservative government over pandemic failures. But with the Tories enjoying a bounce from the vaccine rollout, he was criticised during the local elections for a lack of a positive policy vision. Some Labour insiders blame that for the setback at the polls — in which the party lost 326 council seats and was defeated in the Hartlepool by-election.

On Monday, many colleagues were positive about the promotion of Reeves after a year in which she has been one of the most high-profile figures on the front bench.

As shadow Cabinet Office minister, she took the fight to the Conservative government over its spending on personal protective equipment — expressing anger at the many contracts given to Tory contacts. She has also kept up the pressure on the Conservatives over the Greensill scandal.

Colleagues said as shadow chancellor she will emphasise the need for Labour to show it can be trusted to run the economy — an area of traditional political weakness for the party.

‘Competent and sensible on the economy’

That would continue the theme set by Dodds, who said in a speech in January — using the word “responsible” 23 times — that Labour would offer “responsible economic, fiscal and monetary policy”. The Starmer team has already distanced itself entirely from Corbyn’s 2019 election manifesto, with £83bn of annual public spending increases.

In an interview with the Financial Times last year Reeves struck a similar tone, saying the party needed to be “competent and sensible” on economic matters.

Yet she is not expected to return the party to the “austerity lite” approach of Ed Balls, shadow chancellor under former leader Ed Miliband, who promised not to increase borrowing even for capital expenditure.

One ally said Reeves could be expected to draw up a “transformative” programme — involving changes to the tax system and the decarbonisation of the economy — while also reassuring the public that Labour would spend people’s taxes wisely.

The decision to shift Angela Rayner, deputy leader, from her job as party chair plunged the reshuffle into chaos at the weekend © Jacob King/PA

Starmer’s reshuffle at the weekend was thrown into chaos after allies of Angela Rayner, the deputy leader, leaked she was being demoted from her job as party chair after the local election failures. The ensuing political storm overshadowed some more positive electoral results on Saturday in cities such as Manchester, London and Bristol.

Rayner turned down the job of shadow health secretary and instead took Reeves’s old job as shadow Cabinet Office minister as well as “shadow secretary of state for the future of work”.

Deep discontent

On Monday, after a two-hour shadow cabinet meeting, Starmer was seen buying a coffee at Westminster with Rayner in an attempt to put on a public show of unity after a weekend of acrimony.

Starmer’s bungled reshuffle has sown deep discontent among senior Labour MPs. “You can’t understand how angry people are,” said one. Allies of Rayner said she felt a “deep sense of betrayal”.

The reshuffle saw Dodds move to party chair and Alan Campbell promoted to chief whip with the departure of 70-year-old Nick Brown.

Lisa Nandy, shadow foreign secretary and MP for Wigan, told colleagues she was convinced Starmer was planning to sack her and it was only a rearguard action by her supporters that persuaded him to drop the plan.

Nandy warned Starmer that she would quit the Labour front bench, rather than be demoted to another role.

Referring to the plans to demote first Rayner and then Nandy, one Labour MP said: “What genius would think it a good idea to demote not one but two women representing northern seats?”

 



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