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The UK Post Article 50 – Interview with Sarah Boumphrey

by and
March 29th, 2017

How much does the EU matter to the UK?

Taken as a whole, the EU is the UK’s largest trade partner. Exports to the EU accounted for 48.1% of the UK’s total exports in 2016. On a country level, however, the USA is the UK’s largest trade partner. Foreign direct investment (FDI) is an important component of UK economic growth, although it has so far failed to regain pre-recession highs. Migration is responsible for roughly half of population growth each year. Since 2014, around 40% of migration to the UK has been from EU countries.

How much does the UK matter to the EU?

The UK plays a significant role in the EU, both economically and demographically. In 2016, the UK was the EU’s third largest economy – behind Germany and France (at market prices). It is also outperforming many other large EU economies, contributing 24.8% of the EU’s economic growth between 2010 and 2015. The UK was the EU’s second largest consumer market and was responsible for almost one-in-five dollars spent in the EU; again it is fast growing, responsible for 43.3% of growth in consumer expenditure since 2010.  Furthermore, it was the EU’s fifth largest exporter and also the destination for 7.8% of EU exports. Germany is the bloc’s chief exporter to the UK. It was also home to 13.0% of the bloc’s population and was the destination for 18.2% of all EU migrants in 2014.

How has the UK’s economy performed after the referendum’s results in June 2016?

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.

What will be the outcome for the UK?

The medium-term outlook depends very much on the terms of the exit negotiations, making it very difficult to quantify the economic impact. Depending on the “divorce” negotiations, an array of threats and opportunities would exist. 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.

What will happen in case of no-deal Brexit deal 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- would cause real GDP growth declining by a cumulative 2.9% over five years, according to Euromonitor’s forecast model. Real GDP growth would not return to baseline rates of growth until 2025. By 2021, unemployment would top 6.5%, against 6.0% in our baseline scenario. Even eight years on from the 2019 deadline for leaving the EU, unemployment would remain slightly higher than in our baseline scenario. We are expecting inflation to rise significantly in both outcomes, due to the weak currency, but in a No-Deal scenario the spike would be higher at 3.1% in 2018 compared to 2.8% in the baseline scenario, before returning to within the Bank of England’s target of 2.0% by 2022. In a No-Deal scenario, the Bank of England would loosen monetary policy and cut interest rates.

Which companies would be mostly affected?

A company’s exposure to the UK is one of the most important factors in assessing the impact Brexit will have on the bottom line. It is not the only factor though. Spillovers on other European markets mean that exposure across the EU has to be taken into account, as do elasticities of demand. Some categories are more resilient to declines in real income for instance. Operational issues also impact – cost versus sales base for instance.

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.

What would be the impact on the food industry?

According to our Industry Forecast Model, looking at forecast volume growth, in a No-Deal Brexit scenario, confectionery, ready meals and baby food would be the most-affected packaged food sectors in the UK. Within this, volume sales of chilled ready meals, chilled lunch kits, gum and chocolate are most influenced.  Chocolate manufacturers are under particular pressure, with their margins being squeezed by rising input costs stemming from the weak pound. The staples of edible oils and rice, pasta and noodles show the least impact with our forecast barely altered. These results are consistent with what we would expect – those that are more discretionary and reliant on income will see the strongest impact.

 

For more information, visit: http://blog.euromonitor.com/2017/03/strategy-uk-article-50-impact-no-deal-brexit.html

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Euromonitor Communications

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.

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