Before Brexit, the EU referendum poll, economists predicted that leaving the European Union would be an economical disaster. And it’s looking like there is a real possibility that the Brexit would shrink up the UK government by up to 8 percent by 2030. The howl of despair has echoed outside of global financial markets. Some of the biggest British banks are now moving their operations to other stronger Euro-Zone economies like Paris or even Trans-Atlantic New York.
Under Article 50 of the Treaty on European Union, any country leaving the EU has two years in which to negotiate a withdrawal agreement before the Treaties cease to apply to that country. The United Kingdom now has the two-year negotiation period (which could even drag on for years) to effectively be in the EU with access to a single market. A detailed Brexit analysis shows leaving the EU could be a game-changer, but not for all industries.
TRADE & MANUFACTURING
The European Union is the destination of half of all British goods exports. Official trade statistics reveal that 63% of Britain’s goods exports are linked to European Union membership. Moreover, around 60 countries trade freely with the United Kingdom because they have a free trade agreement with the EU.
Not only that, 18% of the European Union’s growth goes to the United Kingdom, compared to 50% of Britain’s export to the EU. With the exception of Germany, Britain is one of the most important manufacturing markets in the EU under the free trade agreements.
Britain could remain as a part of the single market by becoming a part of the European Economic Area with access to the free movement of services, capital and people. It could also opt for the European Free Trade Association to access to the single market through a series of bilateral agreements. Until the final days of the EU Referendum, the whole point of leaving the EU was to gain substantial extra freedoms, which under the European Free Trade Association would not be possible. Exporters in the UK would face extra costs in selling into the EU. These include additional costs of clearing customs and the administrative costs of complying with the European Union’s rules of origin. Exporters might also face other barriers such as quotas.
These factors would prove to be a hassle rather than a barrier to carry-out trade. Between 1993 and 2011, the United Kingdom was only the 28th fastest growing exporter to the other 11 founding members of the single market. Export to the EU make up 85% of Britain’s GDP. Even in worst-case scenario, the World Trade Organization option will help govern UK’s trade with Europe by the ‘most-favored nation’ rules. This way, Britain would be subject to the same meaningful tariff as the EU chargers to other non-member nations.
Perhaps, job cuts might be the most economically catastrophic events through Brexit. Around 3 to 4 million jobs are dependent on exporting goods and services in the EU. Production sectors too, face a more uncertain outcome.
News trade deals, as fast as they are signed, might open up fast-growing markets outside Europe and improve the UK’s manufacturing industry and good exports. This would further rebalance the economy. Boosting exports of manufactured goods might help Britain’s current account, competitiveness and support a newly independent, well-balanced economy.
Before we jump into a Brexit analysis on foreign investment, let’s first outline the scale of investment from the EU. The European Union is an important source of foreign direct investment in the British economy. Total foreign direct investment in 2013 amounted to 46% of the United Kingdom’s stock. While the inflow of foreign direct investment from the EU has been slowing in recent years, it may now dry up and parent companies may even close-up shop and prove offices in favorable countries. This could affect Britain’s long-term potential as one of the global financial powerhouse.
World Bank’s Doing Business survey put Britain on top in areas such as attaining credit, dealing with construction permits and protecting minority noted Woodford Funds in the most latest Brexit Analysis. The country is highly likely to benefit from good transport connections. It will be more successful in attracting inward foreign direct investment if the Brexit doesn’t impact legal and regulatory agreements.
Exports of financial services to the EU in 2013 amounted to £19.4bn; while imports were at £3.3bn. Financial services amounted to 0.9% of British GDP at £16.1bn surplus.
The sharp drop in British pound – a 9 percent drop and its lowest value in 35 years – has sent ripples across the global financial sector. The Brexit impact on financial services are more immediate than in most other sectors.
It is worst fears coming true for major British banks. Yesterday, stock in Lloyd’s and Barclays, two of the UK’s major financial institutions, were down nearly 20 percent. For quantitative easing or lower interest rates, some of these banks are moving to other financial powers like France, New York and Germany.
To avoid losses, Britain might have to adopt all European Union financial rules and many other regulations. But, this way, it would lose its ability to influence or even, block catastrophic damages. To get a strong hold on the market, Britain will need to negotiate bilateral trade agreements with the EU. Britain could take cues from Switzerland, which happens to have done this before. All Swizz banks do not hold passporting rights. In order to operate their European investment banking business they have to rely on subsidiaries in London. Britain may not get a sweet deal with the EU, like Switzerland did. But, it could increase financial services exports to Hong Kong and China. UK’s total financial services exports currently amount to 2%, even though China is the world’s second largest economy. Similarly, it could broker trade deals with emerging markets outside of the EU, which would further pay dividends for the financial sector in the long run. After Brexit, if Britain remains successful in expanding financial services exports, it could bring a ray of hope to the overall sectoral balance by 2020.
In 2014/15, Britain’s government paid a standard £13.7bn contribution, based on the size of its economy to the EU. In addition, it paid a £2.3bn payment as a share of Value Added Tax receipts to the 27-nation bloc. In return, it cashed £4.8bn through rebate and a £0.8bn fee for collecting duties on the European Union’s behalf. All of this, added up to £10.4bn in the cost to the public finances.
Leaving the EU might save about £10bn per year in the name of budgetary contributions. This figure will result in overall faster economic growth. It should be noted, however, that the probability of savings lessens due to a number of factors. Brexit will certainly offset lower migration and economic disruption. The British government could make substantial contributions to the Union to receive single market access. But this way, it will be compensated on factors such as customs duties to strike new deals outside of the EU et al.
The public sector will get affected, but there won’t be any big, board changes.
CONSUMPTION & PROPERTY MARKET
Now that Britain has lost access to single market, the country’s status as a commercial haven changes. Demand from overseas buyers is likely to drop during the initial years following Brexit. Until now, overseas buyers have accounted for half of all transactions in the commercial property market. By and large, these transactions are foreign investments for operation purposes.
Since factors such as liquidity, size, and transparency are not a function of the EU membership, Britain might not get affected by Brexit. It is possible that Brexit will have little but not substantial negative impact on growth and job creation. But the positive impact is far-reaching.
Brexit Analysis shows there is going to likely to be limited impact on innovation and productivity. Foreign MNCs are productivity-enhancing, bringing innovative management models and technologies. A sharp drop in foreign direct investment could possibly be a game-changer for UK’s productivity outlook.
A Brexit immigration policy might allow the country to choose migrant based on their skill sets and allow it to welcome higher skilled, productive workers. There’s room for improvements from increased foreign investments. Britain is likely to employ some of the European Union’s regulations to continue to export easily into the single access market.
An independent Britain will reap the benefits of new and tailored immigration policy, freedom to make new trade deals, more public savings, and lower levels of regulation.
We like to think that Britain’s economic prospects are good whether or not it stays with the European Union. The markets will stabilize as the months pass in spite of the catastrophic Brexit impact. But for now, a recession in the United Kingdom is more likely than not.