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This article is from our April edition of MarketWatch.
02nd May, 2019
There has been no shortage of warnings about the potential negative impact of the UK leaving the European Union (EU) without a withdrawal agreement. The starkest to date has been from the Bank of England (BoE). In November it published a report forecasting that Gross Domestic Product (GDP) could fall by as much as 8%, unemployment could rise to 7.5% (from 3.9% currently) and UK house prices could fall by up to 30% if there was a no-deal exit.
The prolonged and unclear nature of the Brexit process has already taken its toll on the UK economy:
Economic growth: The BoE recently downgraded its 2019 GDP growth forecasts from 1.7% to 1.2%, warning that a no-deal Brexit could trigger a recession. In 2018, growth of 1.4%, down from 1.8% in 2017, was the lowest since 2012. This is a significant turnaround from the three years prior to the referendum when the UK was one of the fastest growing economies in the G7.
Labour shortages: Net immigration from the EU to Britain has fallen to its lowest level in six years, according to the Office for National Statistics (ONS). This trend has led to labour shortages in areas such as hospitality, construction and healthcare.
Housing: UK house prices recently fell to a six-year low, as potential buyers stepped back, forcing sellers to lower asking prices.
Job relocations: A recent report estimated that up to 80 financial firms are considering or have relocated assets and staff outside of the UK. More recently, Japanese carmaker Honda announced it will close its UK factory in 2021, resulting in thousands of job losses.
In the same way that consumers are delaying ‘big ticket’ purchases such as new cars or houses, businesses in the UK have also been deferring investment decisions as they await the outcome of Brexit. Business investment has fallen in the last four consecutive quarters (see Figure 1). The concern now is that there will be a longer lasting impact on the UK economy. BoE policy maker Michael Saunders recently voiced concerns that some of this impact may be “permanent”.
UK productivity levels are already weaker than other major regions, and the current uncertainty-induced delays in business investment are likely to widen this gap even further. Productivity is a measure of how efficiently inputs (labour and capital) are being used to produce a given level of output. According to data from the ONS, the UK’s productivity growth is already 18% lower than the G7 average, 28% lower than the US and 35% lower than Germany.
Higher levels of uncertainty have led to firms taking on additional labour over capital as investing in labour is cheaper and easier to reverse if required. The unemployment rate has continued to tighten since the Brexit referendum in 2016, falling from 4.9% to 3.9%, its lowest rate since the mid-1970s. A tighter labour market and less inflows of immigrant workers should force firms to begin investing more in machinery and robotics, once there is more certainty over the UK’s future relationship with the EU.
WARNING: Forecasts are not a reliable indicator of future results.