Neither to say that the plot twists in the Brexit soap opera are becoming more insanely complicated by the day. Last week EU leaders agreed to offer the UK an extension on article 50 until 31stOctober, which Theresa May has accepted. This means still more uncertainty for businesses and for the markets in general. A great deal of resources has been spent so far to predict how the break-up will affect whole industries as well as individual companies. At this point, no matter the outcome, the ongoing uncertainty is unsettling many.
Who are the losers in the Brexit game?
Equity investors prospered in the months preceding the referendum as UK markets rose to all-time highs, thanks in large part to the cheaper British pound attracting foreign money. However, as Theresa May and the Tories began negotiations, sentiment has slowly changed as the reality of an impossible deal sinks in. Economic data has gradually turned south, and the rapid rise in inflation has put the Bank of England between a rock and a hard place. With that uncertainty, investors have started to turn their backs on the UK.
Banks and Financial Institutions
The banking sector is facing probably the most uncertain future, and will stand to lose the most under a (now quite unlikely) hard Brexit scenario. The UK runs a current account deficit with Europe. However, the service sector operates as a surplus — meaning the UK exports more than it imports. Of its exports, banking and financial services make up 26%. Should a no-deal Brexit happen, trade would fall back to World Trade Organization (WTO) rules – this will lead to the inability to operate on a level field will potentially impact most, if not all, of these jobs. Thankfully, all political talks seem to steer away from a no-deal Brexit at the moment.
By leaving the EU, the UK is forfeiting its "passporting rights." Passporting gives companies the right to sell their goods and services through the European Economic Area (EEA), which currently consists of the 28 members of the EU plus Iceland, Liechtenstein and Norway, while only being regulated in a single country. If the UK is unable to strike a deal for the financial sector, London's title as the financial hub of Europe will cease. Already the lengthy negotiations have come too late for some banks. Goldman Sachs Group Inc. has recently opened new offices in Frankfurt, Milan and Stockholm while Citigroup Inc. has created a new trading hub in Frankfurt.
Retailers in the UK enjoyed some benefits in the aftermath of the Brexit vote. The plunge in the pound, which fell 15% against the US dollar in the weeks following the referendum, sent tourism and spending numbers up. With a weak pound, analysts thought that tourism and spending could have a bright future.
However, the falling pound has already created inflationary pressure that is squeezing many retailers as input costs rise. Several retailers have run into trouble amid the difficult trading conditions, including high street iconic brands such as Marks & Spencer and Debenhams, which have responded by announcing job cuts and store closures.
According to some data recently published by British Retail Consortium (BRC) and accountancy firm KPMG, Britain’s retailers suffered from weaker sales last month as mounting uncertainty over the UK’s departure from the EU led to consumers becoming more wary of making bigger purchases before Brexit.
Shoppers were more reluctant to spend on discretionary goods, despite an improving outlook for household finances from fading levels of inflation and the strongest wage increases for British workers in a decade.
In this gloomy scenario, are there any winners?
According to Ryan Bourne, Head of Public Policy at the IEA – Institute of Economic Affairs, the effect on UK jobs will greatly depend on the deal that will be negotiated. He argues that if the UK were to remain outside the single market, not sign a bilateral trade deal, and abolish all import tariffs, this could lead to the creation of higher-paying, more productive jobs in the UK over the long term.
“The service sectors and very high-end manufacturing would likely flourish. We would also almost certainly see a boost to the UK fishing industry on leaving the Common Fisheries Policy.”
Another sector that might benefit if Britain were to leave the EU is renewable energy. “Following Brexit, we’d be able to reassess some of the most economically damaging regulations, particularly on renewable energy,” says Bourne. There will be some “possible gains of reducing regulations on businesses”, although he says at the moment the “benefits from such gains are hard to measure at a sector level”.
One thing all economists agree on is that the impact on Brexit on the British economy will largely depends on the trading arrangements the UK negotiate with the EU. It will be these terms and agreements that will influence how specific sectors are affected. Without knowing the details of the deals, we can’t know for certain how the UK (and European) job markets and industries will change.
It looks like this Halloween it will be either trick or treat for the UK economy. Only time will tell us…