the uk post article 50: the impact of a no-deal brexit

THE UK POST ARTICLE 50: THE IMPACT OF A NO-DEAL BREXIT

March 2017

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© Euromonitor International PASSPORT 2ECONOMIES AND CONSUMERS : THE UK POST ARTICLE 50 – THE IMPACT OF A NO-DEAL BREXIT

“Hard” Brexit informs our baseline forecasts

Our baseline forecasts assume that a FTA is reached but that this would still mean regulatory and other non-tariff trade barriers, some higher tariffs on services, and the loss of EU passporting rights for the financial sector.

Postponement of risks Economic risks remain on the downside for the UK, outweighing in our opinion any opportunities stemming from Brexit. On the whole, the negative impact of the UK’s decision to leave the EU has been postponed, rather than avoided.

No-Deal Brexit would dampen growth further

Our No-Deal Brexit scenario sees 2.9 percentage points shaved off real GDP growth over five years compared to our baseline forecasts. Real GDP growth would not return to baseline rates of growth until 2025.

Business impact of Brexit is dependent on three chief factors

Exposure to the UK market, product mix, and exposure to EU markets – due to spillovers - all impact on companies’ exposure to Brexit. Companies whose product portfolio contains a high level of discretionary items are most at risk.

Operational and strategic risks predominate for the consumer goods industry

Looking at consumers, although it will be dampened, spending might not be the main challenge for the consumer goods industry. The foremost issues could be operational and strategic – for instance to absorb or to pass on price increases? Relocate or re-focus resources or not? With an ageing population, the strength of the labour market, depending on policy decisions over migration, could pose a longer-term challenge across all sectors.

Key findingsINTRODUCTION




DisclaimerMuch of the information in this briefing is of a statistical nature and, while every attempt has been made to ensure accuracy and reliability, Euromonitor International cannot be held responsible for omissions or errors.

Figures in tables and analyses are calculated from unrounded data and may not sum. Analyses found in the briefings may not totally reflect the companies’ opinions, reader discretion is advised.

With the UK government triggering article 50 to leave the European Union (EU) in March 2017, attention has turned to the details of the “divorce” settlement. In a No-Deal scenario we expect 2.9 percentage points to be shaved off real GDP growth over five years. The impact on the consumer goods sector is very much dependent on product portfolio and exposure to UK and EU markets.

Brexit negotiations beginINTRODUCTION

The UK referendum on 23rd June 2016 set the scene for the exit of the UK from the EU. An unprecedented step for a member state, and one, therefore, fraught with uncertainty.

The UK government will trigger Article 50 of the Treaty of the European Union in March 2017 to initiate the two-year exit process. Negotiations are centred on the technicalities of withdrawal – including the financial cost to the UK - and the future relationship of the EU and the UK.

Our baseline forecasts assume that a Free Trade Agreement (FTA) is reached but that this would still mean regulatory and other non-tariff trade barriers, some higher tariffs on services, and the loss of EU passporting rights for the financial sector.

The scenario of the UK leaving the EU with no deal is a real threat and would have far-reaching implications on the economy.




With a tight timetable and a complicated process, the risk of the UK leaving the EU without a deal is very real: March 29th: The UK government triggers Article 50 to

begin negotiations to leave the EU. Formal negotiations are unlikely to commence until

May or June as the EU-27 will need to agree on “guidelines” which will clarify their negotiating priorities - including the areas in which they will not compromise.

During this period the UK is expected to enact the “Great Repeal Bill” to enshrine EU law into UK law. This will enable the government to amend or repeal EU laws as and when they see fit or are able.

The EU is likely to insist on the terms of the exit being agreed before moving on to negotiating a trade deal.

The EU’s chief negotiator, Michel Barnier, has indicated that October 2018 is the deadline for reaching an agreement in order for the EU member states, the European Council and European Parliament to have time to ratify the deal ahead of the two-year deadline.

By Q1 2018 the terms of the UK’s deal, and the reaction of business and consumers, will be coming into focus.

The road aheadTHE ECONOMIC IMPACT




Despite sometimes dire predictions of the damage the referendum result would inflict on the UK economy, in the months following the referendum the economy has held up surprisingly well: Consumer confidence remained more upbeat than

expected; Fixed investment has performed at pre-referendum

levels; Exporters have benefited from the weak currency. It remains likely that damage to the UK’s economic

performance will start to become apparent in 2017 and beyond:

Up until now nothing has actually changed, the UK is still benefitting from the EU’s principles of the free movement of goods and people;

The upwards pressure that the weak currency places on inflation will suppress real wage increases in 2017 and this will dampen consumer expenditure;

Uncertainty will increase, which in turn will lead to the postponement of investment decisions and, in some cases, the relocation of investment to EU member states.

The risks that we identified before the referendum remain valid. On the whole the negative impact of the UK’s decision to leave has been postponed, rather than avoided.

The calm before the stormTHE ECONOMIC IMPACT

Post-referendum

Post-referendum




Declining ConfidenceThe general uncertainty surrounding Brexit will damage consumer and business confidence.

Weakening InvestmentIncreased risk will lead to a fall in investment. It is also possible that some global firms already present in the UK may switch their HQs to other EU countries.

Current AccountThe UK posts a large current account deficit, which could widen on the back of uncertainty, although the boost to exports from a weak currency could offset this.

Sterling DepreciationPressure on confidence,

investment and the current account combine to cause a

weak currency.

Price PressuresThe UK faces price

pressures from increasing import prices, caused by the weak currency and potential

loss of access to the common market.

Consumer ExpenditureUncertainty, higher inflation,

and fears over economic growth could dampen

spending

Summary of economic risks THE ECONOMIC IMPACT




Our baseline forecasts are based on the likelihood of a “hard” Brexit with the UK leaving the single market and with restrictions on immigration but with a FTA being reached, leaving regulatory and other non-tariff trade barriers, some higher tariffs on services, and the loss of EU passporting rights for the financial sector. However this is not the only option for the UK so we have a more pessimistic scenario: No-Deal Brexit – whereby the UK

fails to reach an agreement with the EU and returns to World Trade Organization (WTO) rules in 2019. Heightened uncertainty and lower labour productivity lead to a long-term decline in UK real GDP of 2.9% relative to the baseline forecast. We assign up to a 50% probability to this scenario over a two-year horizon.

No-Deal Brexit: 2.9 percentage points shaved off real GDP growth over five years

Macro model No-Deal Brexit scenarioTHE ECONOMIC IMPACT




• In any downturn, staples are most insulated from weak consumer confidence and income shocks, whilst discretionary items are most at risk from consumers’ cutting back.

Consumer confidence

• Those with predominantly UK sales but inputs sourced overseas are most at risk from a weak currency.

• UK-based exporters could benefit.

Currency

• Restrictions to immigration law, particularly from EU countries, could lead to labour market shortages.

Labour force

• Some may consider relocating to, or increasing their presence in, countries within the EU and will face associated costs.

Relocation

• Depending on the outcome of exit negotiations , tariff-free access to the EU market may no longer be a possibility.

Access to EU markets

• Uncertainty will have a dual impact on consumer goods companies – it will dampen consumer confidence and business confidence, likely leading to delays in investment decisions.

Uncertainty

The main considerations for the consumer goods industryTHE IMPACT ON CONSUMER MARKETS




FMCG companies standing to lose most due to BrexitTHE IMPACT ON CONSUMER MARKETS

Nestlé stands to lose the most from Brexit – its global retail sales in 2020 would be US$1.6 billion less with a No-Deal Brexit, compared to a no-Brexit scenario. This is despite Unilever’s larger UK presence. The impact is larger for Nestlé mainly because the company’s categories are more elastic to changes in income than Unilever’s. Packaged food and beauty categories tend to be less elastic on average, but bottled water and pet care, where Nestlé has a strong presence, are more elastic. Unilever’s strength is in beauty, which has been historically observed to have a strong resistance to recession.

Note: Y axis refers to company global retail sales difference from "No-Brexit" scenario and "No-Deal Brexit" scenario in 2020, including currency effects. 13 Passport goods industries researched in volume terms.




Uncertainty is the key challenge with Brexit. It has a dual impact in that it creates problems in effectively assessing the outlook, and also because uncertainty is a key adversary of economic growth itself.

Despite the initial resilience of the UK economy, the economic impact of Brexit will be negative – whatever the outcome of the negotiations. The worst-case scenario in economic terms is the UK reaching the end of the two-year negotiation period with no deal. In this “No-Deal Brexit” scenario, we see the impact on the UK economy to be a reduction in growth of 2.9 percentage points over five years.

Due to its importance as a consumer market and its key political role in the UK, there are wider implications for the EU both in terms of its economy and its future as an organisation. The economic impact, however, will not be severe.

Looking at consumers, although it will be dampened, spending might not be the main challenge for the consumer goods industry. The foremost issues could be operational and strategic – for instance to absorb or to pass on price increases? Relocate or re-focus resources or not?

With an ageing population, the strength of the labour market, depending on policy decisions over migration, could pose a longer-term challenge across all sectors.

A negative economic impact is unavoidableCONCLUSION




The outlook for the UKCONCLUSION

The outlook for the UK is weaker following on from the decision to leave the EU and, with all indications pointing to a hard (as opposed to soft) Brexit, has been downgraded further since 2016’s referendum. The outlook will be weaker still should the UK fail to reach a deal.




This is an extract of the full report The UK Post Article 50:

The Impact of a No-Deal Brexit

Buy the full report here

CONCLUSION

http://www.euromonitor.com/the-uk-post-article-50-the-impact-of-a-no-deal-brexit/report

