01 Aug Brexit Through The Gift Shop
On the 23rd June the United Kingdom held a non-binding referendum to gauge the support for the country’s continued membership of the European Union. The so called ‘Brexit’ vote was won by the leave campaign with a slender majority of 51.9%.
In the weeks that have followed we have seen sharp drops and subsequent recoveries in world markets. One month on a great deal of uncertainty remains about the long-term impact of the Brexit vote and how this will effect investors.
Prior to the Brexit vote Neil Woodford, of Woodford Investment Management, commissioned a report from Capital Economics to examine the impact of the ‘Brexit’ vote on the British economy. We believe this report, and the thoughts of Neil Woodford, to be an excellent summary of the economic consequences of this historic referendum. In this article we have summarised the 33-page report to help investors understand the long-term economic impact of Brexit.
The EU may demand that in order to retain its access to the single-market Britain must keep the free movement of labour with the EU. However, given how important immigration was to the leave campaign this is an unlikely outcome.
It is more likely that policy will focus on being more specifically designed to Britain’s immigration requirements. This will probably create restrictions on low-skilled workers and place more emphasis on attracting high-skilled workers.
Trade and Manufacturing
There are advantages on both sides to maintaining a favourable trade agreement between the EU and the UK. Around 63% of all Britain’s exports go to the EU and countries that have free trade agreements with the EU. It is therefore highly likely that a favourable trade deal will be reached.
The worst case scenario is that the UK will be subject to higher tariffs under the “most-favoured nation” rules. This will bring higher costs to exports as will the cost of complying with the EU’s rules of origin.
The flip side of this argument is that the EU’s importance in the global economy is diminishing and the absence of a trade deal may not have such a large impact. In fact, with the freedom to negotiate its own trade deals, the UK may find it can strike quicker and more favourable agreements with non-EU countries once it is free from the EU’s red tape.
Financial Services and The City
The financial services industry is placed in the most precarious position as a result of the Brexit vote because the UK will lose its influence over the single market. This could hurt the City in the short-term, but over the long-term there could be opportunities for growth in financial services as the UK negotiates trade deals with emerging markets.
Regulation, innovation and productivity
There is little evidence that the Brexit vote will have much impact on the productivity of the UK. Historically there appears to be little connection between increased business investment and political developments. On the regulatory side, the estimates that the UK will make huge savings by axing EU regulations are exaggerated. The more likely scenario is that it will keep a lot of these regulations in order to maintain access to the single market.
Much has been made of the risks to Britain’s foreign direct investment as a result of the leave vote. However, there are other reasons why foreign firms want a foothold in the UK other than its EU membership. In the short-term inflows of foreign direct investment may drop due to uncertainty over the terms of Brexit. Depending on how the UK renegotiates its relationships there may be new opportunities that increase foreign direct investment.
Weighing up all factors it looks like Brexit will have a positive impact on the UK’s public finances, but not to a huge degree. There will be an opportunity to save around £10 billion on the contributions that the UK makes to the European Union’s budget. But the negative impacts and disruption to the economy may offset the majority of these savings.
Consumption and Property Markets
There is a clear argument that shows that the property market in London could have the most to lose as a result of Brexit. The financial services industry has a large part to do with holding up this property market and if effected it could have a negative knock-on impact.
Overall, the impact is likely to be somewhat limited and consumption could benefit as a result of independent policy making on immigration, trade and regulation.
If you would like to know more about the information in this article then send us your questions and one of our dedicated team members will contact you.
We look forward to hearing and working with you in the future.