The British government’s decision to more than double the permanent funding of UK Export Finance (UKEF) has been welcomed by industry groups, but any potential benefits risk being outweighed by falling demand from the EU and the unfolding coronavirus crisis.

Chancellor of the Exchequer Rishi Sunak announced in last week’s Spring budget that UKEF would receive £3bn in fresh funding and that a previously temporary £2bn fund would be made permanent. The new commitments bring the agency’s spending power up to £8bn, with an emphasis on lending to support so-called “clean growth” projects and exports of defence and security products.

The British Exporters Association (BExA), a trade association representing UK firms that export goods and services, says UKEF’s direct lending product is “an essential part of a UK exporter’s toolkit for pursuing projects in developing countries”.

“The success of the product to date has been testament to this, with the original £3bn limit being quickly exhausted and the temporary increases announced in 2018 already under pressure,” a spokesperson tells GTR, adding that the new resources will improve British firms’ competitiveness on the international stage.

UKEF describes the measures as a “huge increase” to its capacity. Chief executive Louis Taylor says: “Enhancing direct lending and other world-leading support available from UK Export Finance will encourage overseas companies to source from the UK and help exporters across the country succeed abroad.”

However, the announcement takes place amid wider challenges facing British exporters – not least the outbreak and rapid spread of Covid-19.

“Our sense now is that events have largely overtaken what was announced in last week’s budget,” says a spokesperson for Make UK, an industry group representing the British manufacturing sector.

They tell GTR: “Companies would now have more serious and pressing short term issues given the disruption to trade and the need to look after their workforces, not to mention inevitable financial pressures.”

Part of the disruption is caused by efforts to stop the further spread of the virus. Prime Minister Boris Johnson has already implemented a strategy encouraging employees to work remotely and distance themselves from others where possible, and said on Tuesday extreme measures may have to be taken “further and faster in the coming days”.

Tom Lawton, head of manufacturing at business advisory network BDO, says the government needs “to step up and deliver a clear and supportive industrial strategy to help navigate the choppy waters ahead”.

“As coronavirus fears take hold and the impact on the sector’s crucial supply chains remains largely unknown, businesses should be preparing themselves for more volatility this year,” he adds.

 

Manufacturing exports dropping

However, there is a longer-term issue: falling European demand for UK exports. A new report by Make UK says manufacturers account for nearly half of UK exports, but have experienced “a tough period since the 2016 EU referendum”.

“Unfortunately domestic orders remain low but of greater concern is the fall in demand from customers overseas,” the group adds.

Its research shows demand dipped after the country voted to leave the EU in 2016 and fell sharply at the start of this year. Figures for the first quarter of this year show that export order growth dropped by 2%, the first time they have entered negative territory since the end of 2016. Make UK describes that figure as “shockingly low”.

Hardest hit are base metals, metal products, rubbers and plastics, though demand continues to rise for electrical and mechanical equipment.

“Even before the current situation the shocking drop in exports could not have come at a worse time ahead of potentially difficult trade talks where the clock is running down fast,” says Make UK chief economist Seamus Nevin. “It is now vital that government works with industry to limit the damage to industry and takes whatever steps are necessary to safeguard skills in particular.”

Despite the inevitable disruption to trade talks, the UK government remains insistent that a free trade agreement will be finalised before the end of this year, and that the one-year transition period that started in January will not be extended into 2021.

However, economists point out that even if an agreement is put in place, the introduction of new regulatory requirements and non-tariff barriers overnight will create further headaches for UK firms selling into the European single market.

“Even in the best case scenario, which would be a quote-free and tariff-free trade agreement between the EU and UK from January 1 on, there will be much more paperwork and much more cost for exporters,” says Markus Kuger, chief economist at Dun & Bradstreet.

He tells GTR: “Exporters are facing increasing headwinds, and not all of that is coronavirus. Some of it is Brexit-related as well. From our perspective, exporters that are based in the UK will have a very challenging year ahead.”