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Latest on Brexit and the wine Armada

Imagen1Reality contradicts to an extent the OEMV’s –the Spanish wine industry’s watchdog- soothing and calming, post Brexit vote balm-report. Even if recession is finally kept at bay, a frailer economic outlook, lower wages and a weaker currency are definitely going to put more pressure on the extraordinary increase in recent years of the UK’s imported volume of low added value, bulk wine with no Protected Designation of Origin, in parallel with a decrease in the imported volume of PDO bottled wine. Even though both fluctuations are less obvious in value terms, suppliers of Spanish wines need to resort to their sharpest fangs with their marketing efforts and follow smarter routes to market in order to compensate.

It is easy to understand why the Spanish wine industry got particularly worried about Brexit. In a pre-vote opinion poll, 73 per cent of Spaniards guessed that remain would win.  The UK is Spain’s fifth wine export market in volume terms and number two, close behind Germany, if measured in terms of value. If we consider wines sold under a Protected Designation of Origin only, the UK is clearly Spain’s number one export market, ahead of Germany and the US. In 2015 Spain exported to the UK nearly 160 million litres of wine for a total value of 287 million pounds (euro 343 million), including 71 million litres or 168 million pounds of PDO wines.

A report published 13th July 2016 by OEMV explored the potential future impact of Brexit on the wine trade links between the UK and Spain from monetary, trade and economics angles. The report concluded that no major negative impact was to be anticipated from any of those three perspectives. This is plausibly a mixture of some right analysis with an amount of wishful thinking.

From a monetary point of view, the report describes a back-to-normal situation after the initial shake up, except for the pound exchange rate; if the currency did not reconquer its position, it would diminish the consumer’s real disposable income and increase the cost of imports, ultimately contributing towards higher inflation. Unfortunately, as we speak, reality confirms those fears and, although it has sustained a rising trend since mid-august, the pound is not yet fully recovered.

Financial markets clearly reflected a first shock but prompt and determined reaction from the UK Government and the Bank of England -not accounted for by the gloomier forecasters- have both contributed to bring back the stock market to pre-referendum levels and stabilise the pound. Neither was it anticipated that the whole exiting process could take a long time. Preliminary work intended to guarantee a clear and strong negotiating stance is now said to last until the end of 2016 at least, before actual negotiations start with invoking Article 50 of the EU Treaty; it will take a minimum of two years from that moment before a final agreement on the exit terms is reached.

From a trade angle, OEMV stated in their analysis that Brexit was never justified on the grounds of protectionism and, provided the UK’s long liberal and pro free trade tradition, it would not be sensible to anticipate the introduction of import tariffs that could affect wine. Indeed, current affairs point in that direction and all negotiating parties are aware of the mutual benefits associated with sustaining terms of free trade.

OEMV’s report admits that the strength of the economy and its fiscal health are the real questions hovering above the future of the Spanish wine industry in the UK. At this point it incurs in some sort of naïve optimism and moves on to a double consolation: that a weaker economy might also affect Spain’s competitors and, much in the not-so-liberal, Spanish old fashioned business culture tone, the fact that if the UK becomes a third country, EU support would become available to companies for product and sales promotion. At least, disappointing an analysis.

According to The Economist, consumer spending in July appeared to be healthier than it would have been forecasted two months ahead, with retail sales 4 per cent higher compared to a year earlier. However this index could be misguiding because such was also the case in September 2008, the month that saw the start of the global financial crisis. More reliable signs of the UK’s future economic outlook are long term company decisions such as employment and investment. Indeed unemployment is on the rise which, together with higher inflation and a weaker pound, all contribute towards a reduction in real income.

Whether the UK will manage to avoid recession is seen much dependant on the loosening of fiscal policy that chancellor Philip Hammond has deemed as a priority. Contrary to his predecessor’s planned contraction, he is supposed to announce an infrastructure investment plan –mainly transport, as demanded and recommended as it is needed. This looser fiscal policy does not come at no cost. Accumulated public debt is already high. At the same time, a lax monetary policy is badly affecting pension funds. The Bank of England’s initial GDP growth forecast of 2.7 per cent in 2017 has now been cut down to 0.8 per cent.

Without any intention to open the old debate on alcohol excise duty, this is another threat hovering over the heads of wine marketers. In spite of Mr Hammond’s commitment with alleviating fiscal pressure, an increase on excise duties, aimed at helping with an already high public debt burden, is often deemed as politically easier to sell if in combination with laxer taxing on staple products.

All ships, all ships.

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