Whatever happens next, Brexit is bad for business

Posted at 6:26 AM, Oct 18, 2018
and last updated 2018-10-18 11:02:09-04

Businesses hoping for some clarity about Brexit have once again been left deeply disappointed.

The latest attempt to reach a divorce deal between the United Kingdom and the European Union failed on Wednesday, further delaying the day when their future trading relationship can be agreed.

The United Kingdom is scheduled to leave the European Union on March 29, 2019, but with negotiations deadlocked, a proposed transition period could be extended by a year until the end of 2021.

That’s likely to prolong the agony for executives desperate to know whether they’ll face new barriers to trade.

Damage is already being done

Uncertainty surrounding Brexit has already hurt companies and the economy.

Business investment slumped as companies diverted resources to preparing for Brexit and held off new projects because of the confusion. In order to get ready for life outside the European Union, companies including discount airline EasyJet (ESYJY) have had to establish new offices elsewhere on the continent.

Banks such as Goldman Sachs (GS), Bank of America (BAC) and JPMorgan Chase (JPM) have paid for new office space in other European cities. The Bank of England and the government expect 5,000 banking jobs to leave the country before Brexit has even happened. Thousands more could follow once it does.

The slump in the value of the pound following the Brexit vote made imports more expensive. Companies that were unable to absorb those extra costs have passed them onto customers, leading to a sharp spike in prices.

UBS estimated last month that the UK economy is already 2% smaller than it would have been without Brexit. The United Kingdom was the fastest growing G7 economy when the Brexit referendum was held in June 2016. It is now the slowest.

The government’s latest official forecasts expect growth to slow to 1.5% this year and 1.3% in 2019.

‘No deal’ Brexit would make things much worse

Prime Minister Theresa May has sought to negotiate a deal that would take the United Kingdom out of the European Union while preventing the border checks and tariffs most feared by manufacturing companies.

But given the stalemate, EU leaders have asked the European Commission to work with “even more vigor” on preparations for a “no deal” Brexit, Dutch Prime Minister Mark Rutte said Wednesday.

Even if a last minute agreement is struck, May must still move any deal through parliament, where she faces opposition from lawmakers who want Britain to remain part of the European Union, and others who believe the compromises she has made in pursuit of a deal betray the voters who backed Brexit in the 2016 referendum.

If the prime minister fails to secure enough votes, Britain could crash out of the European Union in March 2019 without a divorce agreement and face a major economic calamity.

Hundreds of agreements governing the way British businesses operate and trade would be void. Tariffs would be hiked and supply chains snarled. Flights could be grounded and food stuck rotting at the borders.

Many companies have already activated contingency plans, as they can’t afford to wait any longer.

BMW (BMWYY) is shutting its Mini factory in England for one month of maintenance immediately after Brexit because it can’t be sure of getting the parts it needs. Pharmaceutical companies including Sanofi (SNY) and Novartis (NVS) are stockpiling medicines in case supplies are disrupted.

Also bad: A ‘bind Brexit’

Even if May secures a divorce deal and gets it through parliament, business leaders worry that the slow rot of uncertainty will continue for years.

Fears are rising that the deal may be so vague that it gives companies and investors no greater clarity on the future trading relationship with the European Union than they had in June 2016.

“You maintain the continuity in the trading relationship, but there is still the overall uncertainty of what will happen in the longer term,” said Mujtaba Rahman, Eurasia Group’s managing director for Europe.

It would mean two or more years where companies won’t know whether they’ll face new regulations, tariffs or customs checks at borders. It’s unclear if they’ll be able to move staff between the European Union and the United Kingdom during the waiting period, or be forced to pay new taxes.

Ivan Rogers, the United Kingdom’s former top representative to the European Union, said in a speech last week that uncertainty was likely to persist for another two years, at least.

“We shall be having precisely the same debate,” he said.

Postponing Brexit won’t undo the damage

While both sides appear determined to stick to the timetable, it is possible Britain’s exit date could be postponed beyond March 2019, or even scrapped if a second referendum is held.

Businesses would breathe a sigh of relief. Investment and production might bounce back and a stronger pound could help household finances.

But for many businesses it is simply too late to avoid the costs associated with planning for a messy Brexit. Companies have already spent money hiring consultants and leasing more office space.

The UK government alone will have spent approximately £2 billion on Brexit preparations by March 2019, according to the Institute for Government, a think tank.

“Much of the output lost in the last two years cannot be recovered,” said Kallum Pickering, senior economist at Berenberg.

Britain’s reputation has also already suffered. The United Kingdom remains the number one destination for foreign direct investment in Europe, but there has been a decline in its standing with foreign investors, according to a report by EY published in June.