The Brexit Vote is in: What Next for the UK?

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.

The economic impact of Brexit is difficult to call

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.

Key Economic Forecasts in a Brexit Scenario

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.

• Our assumptions show real GDP growth declining by a cumulative 2.0% over 5 years, with the biggest impact being felt in 2017;
• Real GDP growth would not return to baseline rates of growth until 2023;
• By 2021 unemployment would top 6.0%, against 5.7% if the UK were to remain in the EU. Even 10 years on from the referendum unemployment would remain higher than if the UK remained in the EU;
• Inflation would spike at 2.7% in 2018 compared to 2.0% in the baseline scenario, before returning to within the Bank of England’s target of 2.0% by 2020.

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

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:

• In forecast volume growth terms, in a Brexit scenario, confectionery, ready meals and sweet and savoury snacks are expected to be the most-affected packaged food sectors in the UK. Within this, volume sales of chilled lunch kits, gum and chocolate are most influenced;

• Brexit should have a muted impact on sales of beauty and personal care products. In total value terms by 2020 the UK market would be US$205 million smaller (in 2015 prices) in a Brexit scenario, than it otherwise would be;
• The impact of Brexit will be stronger on soft drinks than either beauty and personal care, or packaged foods. Overall the sector should see cumulative growth of 1.4 percentage points less in a Brexit scenario between 2015 and 2020. This corresponds with “lost” sales of 475 million litres over this period;
• The impact of Brexit on the hot drink sector is likely to be broad-based but not deep. In volume terms in a Brexit scenario we expect period growth of the sector to be 9.8% to 2020, compared to 10.5% without Brexit;
• In home care the impact of Brexit is expected to be limited. Real value growth in home care between 2015 and 2020 will be 1.0 percentage point lower in a Brexit scenario, coming in at 9.5%;
• The impact of Brexit on tissue and hygiene is broadly in-line with the impact on home care. Between 2015 and 2020 growth in real value terms will be 1.0 percentage point lower in a Brexit scenario, coming in at 2.8%. This translates as US$148 million in lost sales to 2020 (in 2015 prices) or 2.6% of the total market in 2020.

The impact on the EU and the wider world

The answer in economic terms is that it would affect a broad range of countries, but the direct impact would not be economically significant:

• Due to its close trade linkages, Ireland is likely to see the largest negative impact from a Brexit;
• Several non-EU countries are also likely to feel pain, with China, Saudi Arabia and Egypt all expected to see a similar level of impact to Germany in 2017. This is also due to trade linkages.

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.

Difference from our Baseline Forecasts in a Brexit Scenario: 2016-2020

EU will be damaged

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:

• The UK was the EU’s 2nd largest economy – behind Germany. It is also out-performing the other large EU economies, contributing 35% of the EU’s economic growth between 2010 and 2015;
• The UK was the EU’s largest consumer market, and was responsible for 1-in-5 dollars spent in the EU; again it is fast-growing, responsible for 56% of growth in consumer expenditure since 2010;
• The UK was the EU’s 5th largest exporter and also the destination for 7.4% of EU exports. Germany is the bloc’s chief exporter to the UK;
• It was also home to 12.8% of the bloc’s population and was the destination for 11.5% of all EU migrants in 2013.

There are clearly wider political and economic affects which should also be considered, with the very future of the organisation itself under pressure.

Armageddon for the UK economy?

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%.

Now the hard work will begin

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.