Pantheon Macroeconomics on no deal Brexit and stockpiling

Maybe everything will be
alright. Although, maybe not.
Amy
Harris/AP Images

• 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.”

Pantheon 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.”