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The UK population has voted to leave the European Union (EU), and attention will increasingly focus on the direct impact on business, and the practicalities surrounding exit negotiations. Unfortunately, one key word will continue to overshadow the UK economy: uncertainty. This uncertainty will not be a short-term challenge; exit negotiations are likely to last at least two years. “Unknown unknowns” are a major challenge. Added to which, with voters split almost 50-50 in the run up to the referendum, and passions running high, huge divisions have come to the fore, not least within the ruling Conservative party.
Economists were almost overwhelmingly united in their opinions about a vote to leave the EU – it would damage the UK economy. The extent of the damage has been harder to agree on. Despite heightened fears in the immediate aftermath, our macro model shows just a 2.0% fall in GDP growth over 5 years stemming from a Brexit.
Source: Euromonitor International Macro Model
Quantifying the impact of a Brexit is highly speculative, due to the many political variables involved. For example, our scenario does not include any political spill-overs towards other EU members that may wish to leave following the UK‘s precedent nor the potential of a second Scottish referendum. The length of political negotiations between the UK and the EU after the vote is also uncertain.
The uncertainty surrounding the exit strategy will lead to delays in investment decisions and will likely weaken the currency, putting further pressure on the current account.
The impact on the consumer goods industry will be nuanced, depending on exposure to EU markets for inputs and sales, and the outcome of the exit negotiations. Although consumer spending is likely to 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?
Looking at specific categories with the UK consumer goods sector, according to our Industry Forecast Model:
The answer in economic terms is that it would affect a broad range of countries, but the direct impact would not be economically significant:
Although the negative impact will be broad-based but not substantial in any one particular country, it is also clear that it would not benefit any other country. In 2017, none of the 57 countries in our macro model will see an uptick in growth in a Brexit scenario.
However the uncertainty following a “leave” vote will also flow-on to the EU itself. The UK plays a significant role in the EU, both economically and demographically. In 2015:
There are clearly wider political and economic affects which should also be considered, with the very future of the organisation itself under pressure.
There are other scenarios, albeit far less likely to happen, that would be potentially far more serious for the UK. A renewed global crisis, eurozone debt crisis and advanced economy stagnation would all have a far greater impact; and a severe US recession would be almost as detrimental to the UK economy as a Brexit.
Source: Euromonitor International Macro Model
Note: Estimated probability of scenarios: Advanced economy stagnation (AE): 12%; emerging market slowdown (EM): 12%; China hard landing: 8%; Brexit: 40%; eurozone recession: 8%; eurozone debt crisis: 4%; severe US recession: 4%; global crisis: 3%; Latin American stagnation: 10%; Grexit: 8%.
The debate over UK membership of the EU took up much of the government’s focus and caused considerable uncertainty for business and consumers alike. The complexity of the exit negotiations means that this theme of uncertainty will continue for at least two years, possibly longer. Key issues include but are not limited to: negotiating the basis of the UK’s future access to the single market as well as new trade agreements previously negotiated under the EU with third party countries, creating new rules governing immigration of EU citizens and reviewing laws based on EU legislation and directives.
There are also wider challenges facing the UK economy: the government’s fiscal policies continue to be a drag on growth – this could be exacerbated if the government does implement an emergency budget, as does household debt; and the UK faces a real challenge in increasing productivity gains if it is to accelerate overall economic growth. Added to this, the current account deficit, at 7.0% in Q4 2015, reached a record high.
With the referendum now behind the UK, the government should work towards a well-considered exit strategy, whilst also moving to tackle these challenges and unifying the population. This will not be easy – with sharp divisions in the ruling Conservative party and the leadership of the government in question, political uncertainty seems set to continue to be a feature of the UK economy for some time to come.