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New Strategy Briefing: The UK Post Article 50: The Impact of a No-Deal Brexit

by
March 27th, 2017

With the UK government triggering article 50 to leave the European Union (EU) in March 2017, the two-year exit process will begin. Attention has turned to the details of the “divorce” settlement and negotiations will be 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. Yet the scenario of the UK leaving the EU with no deal is a real threat and would have far-reaching implications on the economy. 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.

 

With a tight timetable and a complicated proces, the risk of the UK leaving the EU without a deal is very real. On March 29, 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 the 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.

These issues are explored in detail in our new report: The UK Post Article 50: The Impact of a No-Deal Brexit. We also examine the direct impact a No-Deal Brexit would have on the packaged food, beauty and personal care, hot and soft drinks, tissue and hygiene, home care and travel sectors.

 

A No-Deal Brexit would have a positive impact on the UK travle sector , with the resulting weak currency boosting arrivals. In this scenario, we would expect to see an additional 8.6 million visitor trips to the UK between 2018 and 2021. The biggest single boost would be to arrivals from the USA. US arrivals would increase by a cumulative 899,000 trips between 2018 and 2021. Spending would also increase. Total receipts would increase by a cumulative US$10.6 billion to 2021 (in 2016 prices). Again, the biggest impact will be from US visitors with receipts increasing by US$1.8 billion.

 

Key findings

“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.

We have seen only a postponement of risks so far

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.

A 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.

The 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.

 

For more insight, get the full report The UK Post Article 50: The Impact of a No-Deal Brexit here.

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Sarah Boumphrey

Sarah has 15 years’ experience in economic and consumer research. In her role as Global Lead of Economies and Consumers, she focuses on translating economic and consumer trends information into useful insight. Sarah leads the development of our macroeconomic and consumer trend content, with a special interest in emerging markets.