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Brexit is already undermining the economy—how much worse could it get?


If you leave an economic super-bloc, you pay the price

By George Magnus  

Photo: Victoria Jones/PA Wire/PA Images

The Conservative Party set out with strident Brexit intentions. Yet we have been left with a constitutional crisis, political chaos, corrosion of our security, self-belief and values, and growing risks to the economy. As I write, after initial May-Corbyn talks, no-deal seems less likely, but all of us are mere on-lookers in a remarkable political drama that evolves daily.

Even though a no-deal outcome might prove highly damaging, it was never and isn’t sustainable. Sooner or later, the government will have to talk to the EU about some form of economic relationship. Yet unless that engagement proves to be close and aligns the interests of the UK and the EU, the consequences of Brexit will take us a long time to get over. Indeed, in the economy and in business, the starting pistol has already gone off.

Since the June 2016 referendum, the economy has slowed down significantly. The UK is by no means unique, and others have suffered from slower growth in world trade, the US, China, and the euro area. Worryingly, average UK GDP growth of 1.7 per cent per annum since the 2016 vote slowed to 1.3 per cent in the year to the end of 2018. Consumer spending has grown by 1.7 per cent over the last year, with households racking up more debt. The real Brexit tell-tale though is business investment, which hasn’t grown at all since mid-2016, and was 2.6 per cent lower at the end of last year than it was a year before.

Brexit is reportedly leading to significant stockpiling, evident in recent upticks in purchasing manager reports, and probably also detectable in future GDP figures, but this will unwind soon enough.

Not everyone is worried. Many of the 5.7m small and medium sized firms in the UK, with a mainly domestic focus, see Brexit as an irrelevance or even an opportunity to supplant EU suppliers. The home market focus applies to construction and building firms, and those engaged in, say, the media, leisure, entertainment and hospitality sectors. For these firms, the issue will be more macro-economic, specifically what happens to demand and jobs, and to costs if sterling depreciates again. Global mining and natural resource companies, such as Glencore and Rio Tinto are also less Brexit-sensitive.

Equally though, a lot of firms have been in Brexit-mode for a while. In a recent Institute of Directors survey of 1,200 companies, researchers said that 29 per cent of firms had already taken steps to shift some business operations abroad due to Brexit, or were likely to do so.

In pharmaceuticals, travel and finance, Brexit means regulatory divergence. The European Medicines Agency, for example, has already left the UK, and the EU has insisted that UK firms will need to re-register their products in order to sell into the single market. The sector is rife with reports about threats to supplies, stockpiling of medicines, and warnings of weaker investment.

Travel and transportation delays at borders may be mitigated for a while by arrangements to keep planes flying and hauliers moving goods, but UK operators will need new regulations, databases and infrastructure. EasyJet has established new subsidiaries on the continent because of potential air travel restrictions, and IAG, owner of British Airways, has made overtures to the Spanish government for help in adjusting.

Companies deeply involved in supply chains, such as those in manufacturing, food supplies, and logistics have already acted or plan to move their headquarters or some operations overseas, and announce job cuts. These include Airbus, Dyson, P&O, Panasonic, Philips, Rolls-Royce and Sony. No sector is as significant to the UK as the auto sector, which turns over about 4 per cent of GDP, accounts for 12 per cent of exports and employs over 1m workers, about 16 per cent of which directly and the rest in parts and components firms.

Notwithstanding industry issues over diesel, and the electric vehicle revolution, major auto firms, including Ford, Jaguar Land Rover, and Japanese companies have announced job and investment cuts and/or relocation plans. Most firms have also cited Brexit as a catalyst. The recent EU-Japan free trade agreement has also made it easier and cheaper for Nissan, Honda and Toyota to ship cars from Japan directly to the EU.

So there is much to be concerned about. But the risks do not end there. In the tariff-obsessed trade debate, participants have lost sight of the all-important services sector in the UK. It accounts for 80 per cent of GDP and about £280bn of exports a year. Half the UK’s service exports go to the EU. The OECD recently said the EU offers “a very favourable ‘architecture’ for services trade—a common legal system, free mobility of labour and a common data-transfer regime (the GDPR),” and an exceptionally low level of trade restrictiveness. There’s no question the UK benefits from selling services to the EU from inside the bloc.

Nowhere is this truer than in finance, where, according the research firm New Financial, 269 banks, insurance companies, asset management and other firms are in the process of moving or have already moved business divisions, legal entities, nearly £1trn of assets and some jobs to EU financial centres—notably Dublin. These include Aviva, Bank of America Merrill Lynch, Barclays, Credit Suisse, Goldman Sachs and HSBC. These reports will likely underestimate the damage, as temporary arrangements between regulators designed to ensure short-term continuity expire, and networking effects, sooner or later, take more euro-denominated and client business away from London.

Whether the UK leaves the EU with a deal or without, and whatever the nature of that deal might be, Brexit will have proven to be a rogue by any other name. I am not suggesting that wise public policy wouldn’t eventually be able to mitigate the consequences or compensate in other ways.

Yet we will be on our own in an increasingly acrimonious world. where being part of a big bloc offers benefits we cannot quantify. Moreover, the act of detaching from the EU was, as we can now see, misunderstood or misrepresented. We should worry for the economic risks, but in the fullness of time, these will pass (after they have made us relatively worse off.) What we cannot allow for is the harm that might be done to our security, and democratic ideals and values—which we will have to work hard to sustain.

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