Nigel Wilcock, executive director of the Institute of Economic Development, paints a gloomy picture of the potential economic impact of a No Deal Brexit
This article is the view of the author and not necessarily of Ready for Brexit
As I write this article, EU and UK officials are due to resume Brexit talks in the hope of reaching a deal that can be agreed by leaders at a key summit on Thursday. In my view, a No Deal Brexit will create an economic emergency, and any potential long-term upside (argued by some) will struggle to overcome the poor compound growth rate of a short-medium term slowdown. Here’s why I take that stance:
According to the Government’s analysis, a No Deal Brexit will result in additional paperwork, border delays, an immediate imposition of tariffs on large numbers of outbound goods and fewer tariffs to be charged by the UK. Additional paperwork takes time, inevitably impacting on profit margins. Border delays will result in lost export orders or the need to increase inventory to cope with additional days of stock sat in transit. Tariff imposition will either make UK goods more expensive overseas (reducing sales) or will force exporters to cut their prices (reducing margins). The Government has set out its proposed tariff regime which means that, for a large number of products, the cost of imports from outside the EU will fall – undermining UK suppliers. There is a view that food and fuel will be two areas significantly affected – essential products where price rises have a disproportionate effect on lower income groups.
Sterling has come under pressure amid uncertainty and No Deal is likely to result in further deterioration in the value of the pound. This will lead to inflationary pressures as a result of the increase in the cost of imported goods – and will be exacerbated by the tariff impact on some products. Inflationary pressures will reduce consumer demand, but they are also likely to increase pressure on the Bank of England to increase interest rates to meet their long-term inflation targets, further impacting consumer spending. It will also result in greater economic hardship for elements of society most reliant on borrowings. A responding Government stimulus effect through spending or fiscal measures is made difficult through the continued public sector deficit position. It is difficult to envisage anything other than a negative macro policy position resulting from No Deal in the short-term.
The immediate downsides of No Deal suggest lower income groups will be disproportionately affected (high proportion of spend on food, fuel and interest charges) and businesses involved in import/export trade (manufacturing, wholesale, retail) will face disruption. In addition, any business focused on domestic discretionary spend is also likely to be affected by a general economic slowdown. The result is that knowledge-driven, high-value added, flexible and fast-moving economies are likely to be least affected, whilst those economies that are structurally more traditional will be less able to adapt. Generalisations in this area are dangerous, but it is easy to foresee a scenario where the digital cluster of Liverpool Street, London (Silicon Roundabout) adapts and continues to grow compared to the automotive branch plant economies of Sunderland or Ellesmere Port. Economic analysis has suggested that No Deal will worsen and hasten economic divides, despite those economies being left behind in economic terms tending to favour Brexit.
This is more difficult to predict – but one area that the economic debate has overlooked is the impact of overseas ownership on the UK economy. Globalisation has resulted in flows of capital resulting in large changes in the ownership and control of companies. The UK has been particularly laissez-faire in policy regarding change of ownership of influential businesses – European businesses typically allow business councils influence over such decisions. In a period, however, of major economic disruption, there is a risk that remote UK subsidiaries bidding for Head Office investment against competing locations will now be disadvantaged. Large-scale foreign ownership, built up over time, may now result in a gradual flight of capital from the UK economy – and this capital is more likely to have been sticky if business had remained UK-owned. A further note on foreign ownership of the more dynamic businesses is export policy is likely to be controlled from Head Office.
It is impossible to provide any certainty, but one very well-evidenced economic model that does help predict future trade and investment with overseas markets is ‘Gravity Modelling.’ Simply put, all other things being equal, economic links are most likely with the largest and closest markets. This predicts that shoppers in Reading, if they leave Reading, are more likely to shop in London than Bristol. Extrapolating this view, even if the German market becomes difficult for UK exporters, it is unlikely that the volume lost in sales will manage to find markets in the Far East. Equally, any investment lost to the UK from EU neighbours is unlikely to be replaced by investment from strongly-performing Asian economies who continue to see huge opportunities on their own doorstep. All in all, arguments for long-term upsides are difficult to fully reconcile with long-term economic evidence.