What would British business be like after Brexit?
A vote to quit the would have many consequences for the UK, some more apparent than others. George Osborne argues that life after Brexit would be characterised by market turmoil and a shock to the government’s finances that will force ministers to impose even more austerity. Here we look at what business groups, analysts and economic forecasters have said will be the effect on the economic landscape should the UK vote to leave.
According to one forecast, the pound will sink by up to 30%. Most forecasters have plumped for 18% to 20%, but Ian Harnett, the chief investment strategist at Absolute Strategy Research, who is a former chief European strategist at the investment bank UBS, believes the dangers of leaving the EU are even greater than many imagine. He says markets are complacent and that the 12% fall in the pound’s value against the dollar since last November is a mere taster for a bigger tumble. For businesses and consumers, that means the recent trend for fuel prices to tick higher will accelerate.
Foreign holidays will be more expensive. Britain’s reliance on imported food will also increase costs for food manufacturers and the consumer. The Remain camp, using a conservative 12% decline in sterling as their measure, calculate each household will be £220 a year worse off as the buying power of a weaker pound increases the cost of foreign goods.
The fall in sterling does have a benefit too, however – it will make exports cheaper. Few doubt that, short-term at least, Britain’s exporters will get a boost. But there could be barriers to trade in the form of higher tariffs – not immediately, but when Westminster and Brussels have negotiated an exit.
Most campaigners, including Michael Gove and Nigel Farage, have rejected clinging to the single market since it is clear that would mean accepting free movement of labour and unlimited immigration from the EU.
According to economist Patrick Minford, a member of the group, the best advice for the chancellor would be to cut import tariffs to nothing immediately after the vote. Minford says trade would quickly accelerate simply by relying on World Trade Organisation rules.
At the moment, Brussels attaches high import tariffs to many foods, especially beef, coming from outside the EU. These would be abolished, allowing South American farmers to compete with domestic and Irish beef farmers and undercut them.
This “open markets” policy without reciprocal agreements is too generous to the UK’s competitors, say Remain campaigners, and would wipe out the domestic businesses shielded by tariffs.
But Minford says it would let businesses spread their wings. He would offset damage to industries protected by high tariffs with some short-term subsidy and by scrapping regulations in areas such as working hours, gender equality and climate change.
Johnson and Gove have also argued that tariffs to access the EU’s single market would be low following negotiations because member states would not want to lose access to the UK, the world’s fifth-largest economy.
Setting aside the fact that the Minford formula throws away all the UK’s bargaining chips by unilaterally lowering tariffs to zero, US investment bank Morgan Stanley says the Leave camp would be likely to win an arm-wrestle with Brussels over trade, at least in relation to cars. In a report this year, it said: “Europe has as much, if not more, to lose than to gain from its access to the rich and large UK market, with over €30bn in annual export sales, and potentially €3bn-€4bn in UK earnings.”
The financial services industry is split between the big banks and insurers around the City and at Canary Wharf, and the hedge fund and private equity businesses that populate Mayfair.
Several banks have said Brexit will force them to rethink their attachment to the UK and review investment decisions. HSBC said in February that almost straightaway it would need to move 1,000 jobs to Paris, where it already has a large operation. Jamie Dimon, the boss of US bank JP Morgan, which is Bournemouth’s biggest employer, said Brexit could mean the UK operation losing a quarter of its 16,000-strong workforce.
A bigger jolt to the City could follow if the European Central Bank tries to overturn a decision allowing firms outside the eurozone to handle large euro transactions. The UK secured a surprise victory last year in the EU’s general court, following a three-year dispute that could have banned the clearing and settlement of euro-transacted deals in the UK. It seems an arcane area of the financial industry, but is the backbone of the sector, which is why the ECB is keen to see it based in Paris or Frankfurt. Some of the biggest clearing houses, which charge a fee to guarantee share sales should one side default, are based in London, including LCH Clearnet and ICE Clear .
More broadly, there is anecdotal evidence that many firms have prepared to move some or all of their business to Hong Kong or Singapore, which would be cheaper and offer more “bank-friendly” jurisdictions, if they are going to operate outside the EU.
Against this solid backing for Remain, hedge funds argue that the impact will be limited. Led by billionaires Crispin Odey and Sir , hedgies have a clear reason to want the UK to leave the EU: a dislike for what they regard as burdensome – and profit-reducing – regulation. They also thrive in volatile markets; Brexit will certainly bring those.
Like Minford, they believe the UK government will be forced to water down regulations to retain their services and stop them from joining the rush to Singapore.
“Those likely to be most affected by leaving the EU would be in and sectors that benefit from the free movement of labour,” says Angus Armstrong, director of macroeconomics at the National Institute of Economic and Social Research. That means financial services, tourism and car manufacturing would be major losers.
Businesses relying heavily on migrants could switch to employing UK nationals should the Leave campaign opt for a points-based system to limit immigration.
That means more UK nationals in London coffee houses and picking carrots in Lincolnshire – but only if wages increase. It is a shot in the dark as to whether consumers will pay more for goods or whether farmers and cafe owners will be priced out of business.
Whatever the outcome, Brexit would prompt a seismic shift after 12 years during which poorer EU nationals have come to the UK in large numbers, either with skills UK nationals have not acquired or lower wage expectations.
Property and asset prices
Usually, a rush to safe havens drives up German government bond values and trophy assets, like central London property. Not after Brexit, according to independently reviewed Treasury estimates that suggest house prices would fall by 10%-18% by 2018.
This sounds dramatic, but when house prices are rising at 8% annually prices may be frozen, rather than crash, which is not such a bad thing for first-time buyers. There would still be a shortage of homes, unless Brexit means sending back EU citizens, or them going home of their own accord.
That said, if it reacts to a fall in sterling by raising interest rates. There is no certainty it would be so foolish as to compound the hit to the economy from a falling currency by pushing house prices off a cliff, but that is what Threadneedle Street has suggested – as has Osborne.
A lower pound raises the cost of imports and inflation. The Bank could tackle higher inflation with higher interest rates that would quickly create thousands of negative-equity property owners and kill the market stone dead. Banks would suddenly have a huge increase in bad loans and no buyers for properties that would be losing value at a time when mortgages would simultaneously have become more expensive.
. The aero engine maker told employees that Brexit would put its planned £65m testing plant at risk and hand US rivals a competitive advantage.
Repeating the sentiment of many multinationals, chief executive Warren East said: “This is because we are a very interconnected operation across Europe. If Brexit occurs, there will almost inevitably be a period of uncertainty, and uncertainty is what we can’t cope with.” Rolls-Royce employs more than 50,000 staff, three-quarters of them in the EU. Major customers include the European aircraft maker Airbus.
The breadth and depth of Britain’s car industry, with plastics and steel suppliers, body parts specialists and high-grade consultancies such as the Ricardo Group on the south coast, mean some economists believe it is one of the major industries that could survive Brexit unscathed.
But the industry, being entirely foreign-owned, is highly integrated into an international spider’s web of suppliers. More than three-quarters of firms believe Brexit would harm business, a found.
Toyota, BMW and Vauxhall have all backed remaining in the EU, as have Nissan, Audi and Land Rover maker Tata, which is currently trying to rescue its south Wales steel plants and arguing that Brexit could jeopardise their survival.
Britain is one of the main beneficiaries of EU science funding and the big five pharmaceuticals companies have been expert at subsidising research with cash from Brussels. , just behind the £8.34bn allocated to Germany. Without a commitment from the UK to replace it, these companies would probably move facilities to other centres in the EU.
Universities play a big part in these projects, but for them (£4bn over the last decade). Research involves collaborating with universities across Europe, so being inside the EU and part of the student programme helps the process of sharing knowledge and PhD students.
Farmers have learned in recent years to survive with reduced EU subsidies and, with further cuts between now and 2020 planned, many argue that an independent UK government would only need to spend a few million pounds to keep the sector solvent.
But a post-Brexit landscape will leave thousands of wheat farmers in the east of England out of pocket – and a post-Brexit government might decide that these farmers, among the UK’s wealthiest, could withstand a little austerity.
Ministers will also have greater difficulty persuading farmers that restrictions on migrant labour are good for the nation, as eastern Europeans are the ones who wade through the mud to bring in the harvest.
EU funding for environmental subsidies will need also to be replaced. Hundreds of schemes are in operation to prevent farmers from pouring excessive nitrogen on to their fields and flooding rivers with slug-killing pellets that wash off the land. These schemes could be funded by and the equivalent bodies in Wales, Scotland and Northern Ireland. But environmentalists are sceptical that there will be any extra cash for green schemes, following speeches by Brexit campaigners about the need to unshackle farmers from overbearing environmental regulations.