Post-Brexit, is the sky falling in the U.K., or is it business as usual?

News of immediate economic damage caused by the June 23 U.K. Brexit referendum might have been overblown, as most economic indicators in the country have recovered. Commentators, on the other hand, are less confident, with many hinting that while the sky didn’t fall on the country straight away, it is likely that as the months go on, the immediate lack of impact could turn into major economic harm.

For example, the latest consumer confidence survey from YouGov and the Centre for Economics and Business reveal that consumer confidence rose to 109.8 from 106.6 in July, the largest jump in three years, albeit from a significant low point. This could be a temporary restoration of confidence, however, warns YouGov, as details of Brexit start to filter through. More importantly, if the Bank of England’s predictions of an economic slowdown become a reality, this confidence could evaporate. On the other hand, YouGov adds: “[A]ll four [confidence] measures looking back over the past 30 days have improved—household financial situation, property value, job security. and business activity in the workplace.”

The latest report on public finances is similarly optimistic, but again comes with warnings. Public sector net borrowing (excluding public sector banks) decreased by £3.0 billion ($4.0 billion) to £23.7 billion ($31.69 billion) in the latest quarter, compared with the same period last year. Public sector net borrowing was also in surplus by £1.0 billion ($1.34 billion) in July 2016, although the surplus decreased compared with a year ago. Public sector net debt, on the other hand, was £35.3 billion ($47.2 billion) compared with July 2015. However, this is the second successive month of debt falling as a percentage of GDP, and it could be an indication that GDP is increasing faster than net debt.

And now comes the warning: “The data presented in this bulletin presents the latest fiscal position of the public sector as at 31 July 2016 and so includes the first post-EU referendum data. However, estimates for the latest period always contain a substantial forecast element and so any post-referendum impact may not become clear for some time.” So no conclusive evidence either way just yet.

“All four [confidence] measures looking back over the past 30 days have improved – household financial situation, property value, job security and business activity in the workplace.”

YouGov Survey



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Next, another “good” and “bad” report from the Resolution Foundation about the effects of Brexit on net migration to the United Kingdom—one of the most contentious issues of the recent “Remain” and “Leave” debate—warns that any reduction in net migration that is aimed at raising the wages of low-paid workers most affected could be negated by wages falling as a result of the vote to leave. The government has a target to “reduce net migration from 330,000 to under 100,000 a year.” This should increase wages “by only between 0.2 and 0.6 percent.” But there are predictions that there will be a general “2 percent downgrade to average wage growth expected after the Brexit vote.”

According to the Office of National Statistics (ONS) latest retail sales report, sales increased by more than expected in July; “This was mainly driven by department stores but also clothing, which may have been influenced by unusually warm weather in July.” The figures estimate that retail sales is estimated to have increased by 5.9 percent compared with July 2015; The report says: “all sectors showed growth with the main contribution coming from non-food stores.” Sales increased by 1.4 percent compared to the prior month, as well as compared to the prior year.

Another ONS report, this time on the labour market, was similarly positive. In the first two quarters of the year, the number of people in work increased. The employment rate was 74.5 percent, “the highest since comparable records began in 1971.” At the same time, the unemployment rate fell; at 4.9 percent, down from 5.6 percent from a year earlier, the lowest rate since September 2005. It is unlikely that these positive figures are an immediate result of Brexit, however, and it would seem that one of the main drivers of the ‘Leave’ vote—foreign workers taking jobs away from British nationals—does not seem to be borne out by statistics.

“The initial reaction was that major [finance] firms would look to move from London (or at least, relocate some of their services) to Ireland, France or Germany.”

David Robson, Head of Research & Development, Wilmington’s International Compliance Training

Inflation was up in July, however, and the weak pound has led to the largest increase in import costs since 2011. Inflation was up to 0.6 percent from 0.5 percent in June, although still low. Indeed, inflation stood at 0.6 percent in the same period last year.

Meanwhile, the Times, citing sources “briefed by ministers,” predicts that the UK’s Brexit could be delayed until late 2019 because the government departments and new personnel are not going to be ready to deal with the issues involved.

According to Capita Asset Services, dividends are forecast to be down during the rest of the year. Justin Cooper, Chief Executive of Shareholder solutions, part of Capita Asset Services, said in a release: “In the short term, investment and consumption will be depressed while the country waits for a response from the new government and for a Brexit timetable to emerge. Dividends will suffer from any slowdown in economic growth, particularly among the U.K.’s mid-cap companies, though a persistently weak exchange rate will cushion sterling investors in the U.K.’s large multinationals.” Short message, if you do business primarily in the United Kingdom, profits are going to be down.

KEY FINDINGS

Below is an excerpt from the Resolution Foundation report, A Brave New World.
Net migration has been above 200,000 since the enlargement of the EU in 2004. This has taken the share of migrants in the population from 10% in 2004 to just below 16% in 2016.
While the growth in the share of migrants in the population did not affect the earnings of native workers overall, it is wrong to say they had no effect. Increased migration did drag on earnings in some sectors (by between 0.5-2.0%), but these small effects do not explain and were in fact dwarfed by the general pay squeeze experienced during the same period (4.7-9.7%). In the next few years a fall in migration will do little to ameliorate the squeeze on wages for native workers.
Reducing the numbers of migrants allowed to enter the UK will pose a serious challenge in some low-paying sectors such as food manufacturing and domestic personnel, where over 30% of workers are migrants. Such sectors will need to adjust their business models with greater investment in skills and technology, have access to temporary workers, or shrink.
Adjusting to a world without free movement, but probably with high temporary worker migration, will require the government to invest in labour market enforcement. At present the three existing labour enforcement units, HMRC, the Gangmasters Licensing and Labour Abuse Authority (GLAA) and the Employment Standards Agency Inspectorate (ESAI), have a combined staff of less than 350. This is equivalent to one enforcement officer for every 20,000 working age migrants.
Source: Resolution Foundation

The Financial Times, also sourcing anonymous officials, says that the United Kingdom has given up on retaining full access to the European single market for goods and services, and that a Norway-style “membership” will not work. The feeling is that the Ubnited Kingdom will try to use the relationship that Switzerland has with the European Union and build on that. In Switzerland, only some industries have full access to the single market.

“Finance is the biggest aspect for us, though I haven’t seen anything where there is a ‘definitive’ impact. I guess it’s because it’s all speculation at the moment but there certainly are reactions brewing in finance firms and elsewhere,” said David Robson, head of research and development at Wilmington’s International Compliance Training. “The initial reaction was that major [finance] firms would look to move from London (or at least, relocate some of their services) to Ireland, France, or Germany. It remains to be seen whether this will happen—but it could be a springboard for cost-saving too, since staffing costs are lower elsewhere. The major U.S. firms seem to be at the centre of this, I think due to the ‘passporting’ element of access to the EU and the implications of that being lost.” Robson pointed to a Business Insider article that discussed how most major banks could move many of their operations to existing alternative EU-based locations from London, with JPMorgan moving to Luxembourg, Citigroup and Barclays to Ireland, and Goldman Sachs to France or Germany. In contrast, European banks may have to set up new hubs in London to access the U.K. market.

“From a U.K. perspective,” continued Robson, “there was also a lot of noise from the manufacturing industry. I’m not sure this was compliance related as such, but more about access, exchange rates, tariffs etc. By way of comparison, I think the whole approach of compliance professionals might end up being similar to how we describe our study materials at ICT, where we have U.K. and international versions. The U.K. ones centre on the United Kingdom, but include information and examples from other jurisdictions, recognising that the U.K. operates as part of a bigger framework. The International courses come at the topic from a wider perspective, but still include reference to the United Kingdom as it remains an important centre and part of the international framework. So ultimately it’s a question of perspective.”

So, in sum, confidence is up and public finances seem to be improving. Migration is likely to be down but wage stagnation may offset this. Employment is up and unemployment is down, but those two are not always automatic corollaries. Inflation is up and import prices are likely to skyrocket further. The outlook for dividends looks bad. Brexit itself is likely to be delayed, but if the United Kingdom can model itself on Switzerland—in its relationship to the European Union at least—that might not be too bad. Banks may leave the City of London, but others may arrive to take their place. All told, that is quite a mixture of positives and negatives post-Brexit, and it is certainly not “business as usual.” Continue the conversation at Compliance Week Europe: 7-8 November at the Crowne Plaza Brussels. Join us as we look at changes in global anti-corruption regulations, slave labour risks in your supply chain, and how to detect fraud, to name just a few topics. Learn more.

Continue the conversation at Compliance Week Europe: 7-8 November at the Crowne Plaza Brussels. Join us as we look at changes in global anti-corruption regulations, slave labour risks in your supply chain, and how to detect fraud, to name just a few topics. Learn more.