The UK Post-Referendum

THE UK POST-REFERENDUM

July 2016

Sarah BoumphreyGlobal Lead – Economies and Consumers

http://www.euromonitor.com/


INTRODUCTION

THE POST-REFERENDUM WORLD

EUROMONITOR’S MACRO MODEL

IMPACT ON CONSUMER MARKETS

CONCLUSION



© Euromonitor International PASSPORT 3ECONOMIES AND CONSUMERS

Brexit on the agendaINTRODUCTION

• The unprecedented nature of a member state leaving the European Union makes assessing its impact extremely difficult and open to interpretation. “Unknown unknowns” are a major challenge.

• Article 50 of the Treaty of the European Union provides for a two-year exit process. Negotiations would be needed on the technicalities of withdrawal and the future relationship of the EU and the UK.

• When the UK government will trigger Article 50 is still unclear




Three issues dominated much of the referendum debate: trade, investment and migration.

Taken as a whole, the EU is the UK’s largest trade partner. Exports to the EU accounted for 48.8% of the UK’s total exports.

FDI is an important component of UK economic growth, although it has so far failed to regain pre-recession highs. The UK received 28% of EU inflows of FDI in 2015.

Migration is responsible for roughly half of population growth each year. Since 2010, around 40% of migration to the UK has been from EU countries.

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

0

350

700

EU Non-EU

US

$ bi

llions

How much does the EU matter to the UK?INTRODUCTION

UK Exports: 1980-2015




The UK plays a significant role in the EU, both economically and demographically. In 2015:

The UK was the EU’s 2nd largest economy, contributing 35% of the EU’s economic growth between 2010 and 2015.

The UK was the EU’s largest consumer market, and was responsible for 1-in-5 $ spent in the EU; responsible for 56% of growth in EU consumer expenditure since 2010.

The UK was the EU’s 5th largest exporter and also the destination for 7.4% of EU exports.

It was also home to 12.8% of the bloc’s population and was the destination for 11.5% of all EU migrants in 2013.

Exports

Population

GDP

Consumer Expenditure

FDI Inflows

0 50 100

UK Rest of EU

% of total EU

2010 2011 2012 2013 2014 201590

100110

EU UK

2010

=100

How much does the UK matter to the EU?INTRODUCTION

Real Consumer Expenditure Growth: 2010-2015

UK’s Contribution to the EU: 2015



INTRODUCTION




CONCLUSION




Revised figures take into account:

Higher trade barriers, restrictions on immigrant labour and relocation of some financial services reduce long-term UK GDP by around 2.5%.

Lower growth expectations and higher uncertainty lead to a slowdown.

The Bank of England will loosen monetary policy and cut interest rates.

2009

2011

2013

2015

2017

2019

2021

2023

2025

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

RevisedPre-Referendum

UK Economic Data Revised DownwardsTHE POST-REFERENDUM WORLD

UK’s Real GDP Growth: 2009-2026




Declining business and consumer confidence

Weakening investment

Widening of the current account deficit

Sterling depreciation

Price pressures

Downwards pressure on consumer

expenditure

Summary of economic risks facing the UK THE POST-REFERENDUM WORLD




Relaxation of legislation

New trade agreements outside of EU should be more straight-forward to negotiate

Savings made on transfers to the EU

Renewed demands for a Scottish referendum

Isolation on global stage and poor relations with European neighbours

Lower migration inflows leading to slower labour force growth

Political uncertainty within the UK – all major parties were Remain

Lack of exit strategy - how the UK wants its relationship with the EU to be and when to trigger Article 50

Opp

ortu

nitie

sThreats

Once the dust has settled the outcome for the UK is uncertainTHE POST-REFERENDUM WORLD




Damage to the post-war European Ideal

Political contagion

Shift in the balance of power

Loss of major net contributor to the budget

Smaller voice on the global stage

Damage to EU-UK trade

Increased competition from the UK

The EU itself faces political and economic risksTHE POST-REFERENDUM WORLD




• Full access to single market• Free movement of people

Norway or Switzerland-style

relationship

• Tariff-free access to single market on goods• Common external tariff

Turkish-style customs union

• Negotiation of bilateral treaty• No/limited free movement of people

Canada-style relationship

Disorderly exit

No Brexit

The UK’s optionsTHE POST-REFERENDUM WORLD

• No agreement reached by 2 year deadline• UK reverts to WTO rules

• UK holds a second referendum• Or a general election is held on basis of

whether to trigger Article 50

Or a unique deal with features of some of the above



INTRODUCTION




CONCLUSION




The UK triggers article 50 by early 2017, starting negotiations to exit the EU.

Negotiations hit irreconcilable differences over free trade and free movement of people.

The UK leaves the EU in 2019 without reaching an agreement. Trade relations with the EU default to WTO conditions with some limited bilateral agreements reached afterwards.

Financial services in the UK lose their EU passport.

Heightened uncertainty and pessimism on the outcome of negotiations amplifies the short term impact of Brexit.

Together with the negative impact on labour productivity and future growth expectations of lower trade volumes, this leads to a sharp decline in UK GDP.

Probability: 30-40%

Brexit scenarios: Disorderly exitEUROMONITOR’S MACRO MODEL




Impact of disorderly exit on key UK indicatorsEUROMONITOR’S MACRO MODEL

• 5% cumulative impact on real GDP growth over 5 years

• Unemployment to reach 6.9%, compared to 6.1% in the baseline forecast

• Inflation to peak at 4.0% in 2018

• Interest rates to fall into negative territory in 2017 and 2018




Brexit scenarios: No BrexitEUROMONITOR’S MACRO MODEL

The conservative party leadership starts having doubts on triggering article 50 after seeing the negative short-term impact of Brexit uncertainty.

Fears of triggering a new Scottish independence referendum and reigniting tensions in Northern Ireland also cause politicians to reconsider exiting the EU.

Since the Brexit referendum is non-binding, the new prime minister puts the declaration of exit from the EU to a parliamentary vote. The majority of MP’s reject Brexit.

This leads to a political crisis and a second referendum, which the Remain campaign wins.

Probability: 5-15%




Impact of No Brexit on key UK indicatorsEUROMONITOR’S MACRO MODEL

• UK real GDP growth would see a strong bounce back

• Unemployment would remain under 6%

• Inflation would decelerate sharply

• Interest rates will gradually be raised



INTRODUCTION




CONCLUSION




Consumer confidence

Currency

Labour force

Relocation

Access to EU markets

Uncertainty

The main considerations for the consumer goods industryIMPACT ON CONSUMER MARKETS

Although it will be dampened, consumer spending might not be the main challenge for the consumer goods industry.

The foremost issues could be operational and strategic.




Which categories are seeing the largest impact or conversely the least impact?

Which categories are big-ticket items? Or reliant on the real estate sector?

Which categories are dependent on tourism?

How did the category perform in the UK during other periods of weak confidence?

Are there options for trading down in the category or from others?

At the category levelIMPACT ON CONSUMER MARKETS




Which companies are most focused on the categories our IFMs show are most affected?

Which companies have a large cost base outside of the UK but a large customer base in the UK? Or vice versa?

Which companies manufacture in the UK mainly for export?

Which companies gain a large share of revenues in the UK?

Which companies have large market share in the most impacted categories?

At the company levelIMPACT ON CONSUMER MARKETS




Discretionary v essential – price and income as a driver

Are there stand-out performers?

Are there exceptions within categories?

How different will the total market be by 2020 with a no Brexit scenario? Or with a disorderly Brexit?

How does the industry compare to others?

Industry ForecastsIMPACT ON CONSUMER MARKETS



INTRODUCTION




CONCLUSION




Uncertainty is the key challenge with Brexit.

Our macro model shows the impact on the UK economy to be a cumulative reduction in growth of 2.5% over five years.

There are wider implication for the EU both in terms of its economy and its future as an organisation.

Although it will be dampened, spending might not be the main challenge for the consumer goods industry.

With an ageing population, the strength of the labour market, could pose a longer term challenge across all sectors.

All-in-all, UK economic growth will be dampened by a Brexit but not to the same extent as the financial crisis.

A lot depends on exit negotiations and the UK’s ability to negotiate trade deals in a timely manner.

Uncertainty is the key wordCONCLUSION



FOR FURTHER INSIGHT PLEASE CONTACTSarah Boumphrey

Global Lead – Economies and Consumers

[email protected]

@SarahBoumphrey



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The UK Post-Referendum