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A YEAR TO GO:
HOW BREXIT WILL AFFECT UK INDUSTRY
Contents
Introduction2
Introduction
This report explores how Brexit will affect trade,
regulations and jobs within six sectors of the UK economy.
In June 2016 the UK electorate voted to leave the EU. On March 29th 2017 the UK prime minister,
Theresa May, wrote to the European Council president Donald Tusk, notifying him of the UK’s intention
to leave the EU, in accordance with Article 50 of the Treaty on European Union. A summit of EU leaders
on March 23rd agreed the terms of the transition agreement reached by the UK and EU negotiating
teams on March 19th. Talks on the substantive issue of the future trading relationship have yet to start
in earnest and a deal is supposed to be done by October 2018 to allow time for ratification.
With a year to go before the UK leaves the EU and the 21-month transition period begins—during
which time the UK will maintain access to the single market and will be bound by the obligations of
membership-- this report analyses the possible impact on six sectors of the UK economy. The transition
agreement provides businesses with some certainty that they will have time to adjust to the new UK-
EU relationship. However, Brexit will nevertheless entail some disruption. In three sectors, we expect
the impact to be direct and difficult to manage—financial services, healthcare and life sciences, and
automotive. In consumer goods and retailing, telecoms and energy, the impact is likely to be more
diffuse but still disruptive.
The first part of the report discusses The Economist Intelligence Unit’s current core forecast for
Brexit, which involves the UK agreeing to a Canada-style free-trade-agreement (FTA) with some
special terms for sectors that are particularly important to the UK economy. This so-called Canada-
plus-plus deal will probably emerge during the transition period. We then outline a “hard Brexit” or “no-
deal Brexit” scenario that involves talks breaking down during the transition period, and the UK leaving
the EU without a trade agreement. Using the usual modelling techniques that underpin our industry
forecasts, we compare how the economic growth projections for these two scenarios would affect key
indicators for our six sectors, unless policies are adopted to mitigate those effects.
The second section of this report is more qualitative and focuses on how Brexit will affect companies
and other organisations operating in our six sectors. The issues at stake mainly involve trade, regulation,
employment and skills and access to investment with much riding on how the UK coordinates its
policies with those of the EU and its institutions.
Our key forecasts are:
l We expect the UK economy to carry on growing in 2018-22 under our core scenario of a Canada-
plus-plus deal and our hard Brexit scenario. However, if the UK leaves the EU without a trade deal we
estimate that by 2022 the UK’s nominal GDP will be 2.7% lower than in our core scenario. Given that
inflation would also rise under a no-deal Brexit, real GDP growth in 2020-22 would probably be halved.
However, our long-term outlook for the UK economy remains positive, regardless of the terms of the
UK’s departure from the EU.
l After Brexit our view is that London will retain its status one of the world’s leading financial centres,
along with New York and Singapore, and that it will also remain Europe’s leading financial hub after
-2 -2
-2.7 -2.9 -3.2
-4 -4
-6 -6
-8 -8
-12 -12
-13.1 -13.4
-14 -14
-16 -16
Health spending Energy Mobile telecoms Bank assets New vehicle Retail sales
per head (£) consumption (ktoe) revenue (£) (£) sales (units) (£)
Source: The Economist Intelligence Unit.
Brexit. There is also a large degree of inter-dependence between the UK and EU financial services
sectors, just as there is for the trade in goods between the UK and the EU. This inter-dependence
matters and means that there is to some degree a mutual interest in achieving a deal that works for
both sides. Even under the core scenario, however, a financial services deal will be partial and some
financial institutions will consider relocating some personnel and parts of their business after Brexit.
The sector is more reliant on global than on EU trends, and will remain a robust driver of the UK
economy.
l The healthcare and life sciences sector is likely to see exports shrink under our core scenario, but
the worst-case scenario—a shortage of much-needed medicines—will be avoided through regulatory
agreements. The slower economic growth predicted under a no-deal Brexit scenario would dent tax
revenue and consumer spending. Unless policies are adopted to mitigate the effect, this would result
in total health spending per head being £90 (US$125) lower in 2022 than it would be under a softer
Brexit. However, the UK government could potentially use some of the fiscal savings from ending
contributions to the EU budget to mitigate the impact on these sectors.
l The automotive sector faces a huge challenge: without a UK-EU FTA, large-scale production in the
UK would become difficult. UK vehicle-makers will try to expand in other export markets, but will also
need to stimulate domestic demand. Under a no-deal Brexit, we forecast that vehicle sales would be
13.1% lower by 2022 than they would be under our core scenario. Cumulatively, the industry would sell
around 840,000 fewer vehicles between 2019 and 2022 than under our core scenario.
l The loss of EU workers and disputes over regulation will affect most consumer goods
manufacturers, as well as the food sector. Unless agreements are reached over mutual recognition, the
effect is likely to push down exports and push up the prices of imports still further. The biggest impact
of a no-deal Brexit would be on retail spending, which could be 13.4% lower in nominal terms in 2022
compared with our core scenario.
l In terms of energy policy, the UK will continue to forge ahead on emissions reductions and
decarbonisation. However, the task will become more difficult and energy costs may will rise if it exits
Europe’s internal energy market. Energy consumption would be 2.9% lower by 2022 if the UK leaves the
EU without a deal and the economy slows as expected.
l The UK’s exit from the “digital single market” will primarily affect telecoms operators with significant
business on the continent. However, there may also be an effect on investment in innovation, as well
as on the prices that UK consumers pay when using their mobile phones abroad. Investment in mobile
technology could be 3.5% lower by 2022 under a no-deal scenario.
again. A business-cycle downturn in the US in 2020 and tougher terms of trade with the EU will also
constrain exports in 2020-22. Nevertheless, we expect real GDP growth to pick up to 1.8% a year on
average in 2020-22.
1.35 1.35
2.0 2.0
1.30 1.30
1.5 1.5
1.25 1.25
1.0 1.0
1.20 1.20
relationship will be the most complex and challenging phase of the negotiations. Under our no-deal
scenario, we assume that they are not successful, leading to a total breakdown in negotiations.
As negotiations for the Withdrawal Agreement will dominate UK-EU talks in 2018, the most likely
timing of this breakdown is late 2019, when trade talks are taking place during the transition period,
after the UK has formally left the EU. The transition period will last until end-December 2020, resulting
in a “cliff-edge” withdrawal in 2021.
The first economic impact would be a heavy depreciation of sterling against the euro in late 2019,
but it would probably stabilise during the course of 2020 as the government focuses on contingency
planning and on laying the groundwork for FTAs with non-EU countries.
The UK will also have to start installing the physical and technological infrastructure necessary
to cope with a vast increase in the number of customs procedures associated with UK-EU trade
from early 2021. There may be an emergency agreement with the EU to phase out customs union
membership gradually, as an abrupt end would disrupt the operations of businesses on both sides.
Nevertheless, under a no-deal scenario we would expect a sharp drop in UK export sales growth in
2021, with only a slight pick-up in 2022. We assume that new trade deals will not compensate entirely
for the loss of EU trade, and certainly not as soon as 2022. The drop in the value of sterling in 2019 would
push up inflation, particularly in 2021, weighing heavily on household purchasing power and therefore
triggering a fall in household spending.
Higher input costs and a spike in economic uncertainty would also weigh on gross fixed capital
investment as capital spending plans are delayed and businesses devote more resources to
contingency planning. Employment growth would stall, and possibly contract, also weighing on
household confidence and spending. Looser monetary policy from the Bank of England (BoE, the
central bank) and expansionary fiscal policy would only partially mitigate the drop in domestic
demand, not least because the room for manoeuvre in both policy tools is very limited.
10,000 10,000
8,000 8,000
6,000 6,000
4,000 4,000
2,000 2,000
0 0
2016 2017 2018 2019 2020 2021 2022
Source: The Economist Intelligence Unit.
The loss of free trade in services under a no-deal Brexit will lead, in our five-year forecast, to fewer
loans being made from the UK and fewer deposits being held there as demand from EU27 clients shifts
to EU-licensed institutions. Some activities and funds should also flow back to the UK, but the net
effect is likely to be mildly negative in the short term since UK financial firms have a greater presence in
the EU27 than their EU27 rivals have in the UK.
We expect growth in UK bank assets to be slower under a no-deal Brexit as the sector loses its
European heft. By 2022 we expect bank assets to rise by 4.4% under our baseline scenario, but by only
0.3% under a no-deal scenario.
A second impact is the likely fall in overall UK economic output, which is an important driver of
banking indicators. As the automotive, pharmaceutical, aerospace and services sectors suffer from
reduced trade, lower profits and wages will be generated for use by the UK financial system and banks
specifically. However, these effects will be fairly modest; we do not expect Brexit to drive the UK
economy into recession, but merely to trim growth rates.
3,363
3,000 3,000
3,273
3,259
3,178
3,167
3,106
3,071
3,059
3,005
3,005
2,921
2,921
2,500 2,500
2,759
2,759
2,000 2,000
1,500 1,500
1,000 1,000
500 500
343
335
331
325
327
319
308
309
293
293
285
285
272
272
0 0
2016 2017 2018 2019 2020 2021 2022
Source: The Economist Intelligence Unit.
tax receipts—will leave the government with little room to expand healthcare funding. Even if some of
the UK’s net contributions to the EU budget are redirected towards the NHS, spending will be tight.
We expect spending to be marginally lower in 2019 under a no-deal Brexit, but the gap will widen
from 2020 onwards if economic growth slows as expected. In 2022, unless policies are put in place
to mitigate this, we would expect total healthcare spending to be 2.7% lower than under our core
scenario.
A further drop in sterling against the euro and the US dollar would increase the cost of
pharmaceutical imports, putting an even greater strain on the NHS’s resources. Our expectation is that
pharmaceutical spending will be 3.5% higher per head by 2022 under a no-deal scenario compared with
our core forecast. Staff costs, too, would rise as the ability to recruit EU nationals diminishes, affecting
frontline care.
2,500 2,500
2,730
2,693
2,693
2,614
2,541
2,541
2,462
2,375
2,375
2,371
2,369
2,369
2,362
2,356
2,000 2,000
1,500 1,500
1,000 1,000
471
440
440
444
500 500
420
420
419
411
407
407
402
400
399
399
0 0
2016 2017 2018 2019 2020 2021 2022
Source: The Economist Intelligence Unit.
2.0 2.0
1.97 1.97
1.5 1.5
0.5 0.5
0.43 0.46
0.35
0.0 0.06 0.0
-0.36 -0.36 -0.20 -0.20 -0.41
-0.5 -0.5
-0.63
-1.0 -1.0
2016 2017 2018 2019 2020 2021 2022
Source: The Economist Intelligence Unit.
Given slow wage growth and uncertain consumer confidence, we expect retail sales volumes to
contract by 0.2% under both scenarios in 2019. However, in 2020 retail sales would recover less strongly
under a no-deal Brexit than under our baseline scenario, owing to the weaker pound and higher import
tariffs on goods from the EU.
However, the biggest difference between the two scenarios would come in 2021. If our core scenario
holds, then the UK should secure an FTA, protecting consumer confidence as the transition period
ends. As a result, retail sales would rise. However, under a no-deal Brexit, the hit to confidence,
together with higher inflation in 2021-22, would trigger a fall in household spending and retail sales in
those years. Slower economic growth and a weakened jobs market would further undermine consumer
confidence.
190,000 190,000
185,000 185,000
180,000 180,000
175,000 175,000
170,000 170,000
2016 2017 2018 2019 2020 2021 2022
Source: The Economist Intelligence Unit.
A no-deal Brexit scenario, in which the UK’s GDP growth slows significantly to an annual average of
0.9% in 2020-22 compared with our baseline scenario of 1.8%, would result in energy consumption
falling by an average of 0.5% during that period.
Falling household incomes and lower industrial and economic activity would mean lower
consumption of oil, gas and coal compared with the baseline scenario, while growth in electricity
consumption would also be lower. Although energy trade is unlikely to take a direct hit from the UK’s
exit from the EU, any disruption in the supply chain could push up costs and prices in the sector.
Overall, we expect energy consumption to be 2.9% lower in 2022 under a no-deal Brexit than it would
be under our core forecast.
6.0 6.0
5.0 5.0
4.0 4.0
3.0 3.0
2.0 2.0
1.0 1.0
0.0 0.0
2016 2017 2018 2019 2020 2021 2022
Source: The Economist Intelligence Unit.
Ireland and the Netherlands. High salaries also mean that they have a disproportionately big impact on
economic output and tax receipts.
The four competitor economies may pick up some of this employment, as economic activity shifts
from UK-based to EU27-based firms. Some positions could also be relocated to specialist hubs such
as Luxembourg for insurance and fund management, or Poland for back-office functions. Some posts
might migrate to headquarters located outside of Europe in New York, Tokyo or Beijing. Company
announcements over the past year and a half indicate that Frankfurt, Germany’s financial centre, is
picking up the bulk of the relocations. Some jobs may also move outside Europe, to financial centres
such as New York and Singapore.
However, even if banks move their European headquarters not all jobs will move from the UK.
Financial services businesses in London benefit from other attributes, such as a convenient time
zone, the international business language, and an existing concentration of associated business
services (accountancy, consulting and law).The strength of London as a financial centre is that it
possesses a unique infrastructure to support the sector. That infrastructure combines an hospitable
legal framework, a deep knowledge and a skillset based on an established financial services tradition.
It also offers access to a very large talent pool, strong technical and IT capacity and a deregulated
business environment that has spurred innovation and new product development. These strengths
are not readily or easily replicated in the other financial centres of Europe such as Paris, Frankfurt and
Amsterdam, or smaller centres such as Dublin or Luxembourg.
margins and a rise in share prices. Financial firms themselves are much better prepared for disruptions,
with stronger capital positions, stricter regulations and more vigilant oversight.
Moreover, UK financial services firms are not only dependent on EU business. Globally London ranks
alongside New York as one of the world’s leading financial centres, and its financial firms will continue
to cater to demand from outside the EU, as well as within.
Health spending
The biggest question is over how Brexit will affect overall healthcare funding in the UK. In the run-up
to the 2016 Brexit referendum, the Leave campaign claimed that leaving the EU would free up £350m
(US$490m) a week, which could be channelled to the NHS. The claims became notorious, yet there is
no doubt they were popular. Once the UK’s contributions to the EU budget tail off, probably around
2021, the government will come under pressure to announce another NHS funding boost, in addition to
the one announced in October 2017. This may include redirecting some of the UK’s net contributions to
the EU, which are estimated at £9.4bn in 2016, towards the NHS. A far bigger issue, however, is whether
government tax revenue will be affected by Brexit, and therefore whether funding for both the NHS
and social care will need to be constrained further.
We currently expect GDP growth to average 1.6% a year in 2018-22, down from 2.2% over the
previous five years. As part of its efforts to improve the UK’s competitiveness, the government is also
cutting the corporate tax rate: it fell from 20% to 19% in 2017 and will fall again to 17% in 2020. These two
factors combined are likely to bring down corporate tax revenue at a time when the ageing of the UK’s
population could also affect revenue from personal taxes, particularly if net immigration falls.
If the government is forced to tighten its belt, then health spending will continue to be protected
from the worst of any cuts. Even so, spending growth will be slow. The annual NHS budget is projected
at £124.7bn in financial year 2017/18 (April-March). The Office for Budget Responsibility expects that
to rise to £128bn in real terms in 2020/21, implying an average annual growth rate of just 1.1%—low in
historical terms. Local governments, which fund most social care, will continue to be squeezed far
harder, particularly in areas with EU-dependent companies or elderly populations.
NHS employment
With a total staff of over 1.5m, the NHS is the UK’s largest employer, with wages accounting for around
65% of its budget. Around 10% of hospital doctors and 7% of nurses are EU nationals, according to a
recent parliamentary briefing (although the British Medical Association puts the EU share of doctors as
high as 21%). Around a third of these EU health workers are in the London area, which puts the capital’s
healthcare system at particular risk.
In December 2017 the government finally issued a long-awaited guarantee that EU nationals already
in the UK can stay. However, the UK is still likely to become a less attractive location for them, not
18 © The Economist Intelligence Unit Limited 2018
A YEAR TO GO:
HOW BREXIT WILL AFFECT UK INDUSTRY
least because of the fall in the pound. Not many NHS employment by origin, 2016
EU nationals seem to be leaving the NHS yet, ('000 people)
but fewer are joining, particularly in the nursing Doctors Nurses and health visitors
profession. Entry will become even more difficult 350 350
after Brexit.
300 300
These trends are concerning because Health
Education England, which manages NHS 250 250
Pharmaceuticals trade
The upshot of these calculations is highly likely to affect foreign investment in the UK’s life sciences
and healthcare industries, which totalled US$31.4bn over the past 24 months, according to fDi
Markets. Many foreign pharmaceutical companies are based in the UK because of the ease of EU
trade, and the presence of the EMA, which allows them to monitor and perhaps influence EU policy
on pharmaceuticals. Brexit will force them into a regional reorganisation in order to minimise the
disruption to supply chains.
The Brexit deal will also have an immediate impact on the UK’s pharmaceuticals trade. Even in a
hard Brexit scenario, there will be no tariffs on most medicines, which are exempt under World Trade
Organisation (WTO) rules. However, non-tariff barriers (primarily regulatory differences) could still
be costly for both EU and UK companies. There are also likely to be bottlenecks: with the UK’s trade
infrastructure, including the ports at Dover, currently geared towards free trade, checking paperwork
will be a slow process.
UK's pharmaceuticals trade with the EU
(£ m)
Exports Imports
25,000 25,000
20,000 20,000
15,000 15,000
10,000 10,000
5,000 5,000
0 0
2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: UK Office for National Statistics.
The crux is the system of mutual recognition, which allows both the EMA and the UK’s Medicines
and Healthcare Products Regulatory Agency (MHRA) to approve products for sale across the EU. This
system will not survive Brexit unless there is a deal. In guidelines published in 2017, the EMA said that
medicines that are already on the market will still be legal across the EU because they were approved
under EU rules. However, any future drugs will have to be approved separately for the UK and the EU.
It is also not certain that the EU will recognise trial data or other evidence collected in the UK as proof
that a medicine is effective and safe.
All this would add considerably to the cost and complexity of bringing drugs to market, and could
even cause medicine shortages. A mutual recognition deal would avoid many of these problems, if it
allows actions by the UK regulator to count towards EU authorisation. In return the UK would have to
agree to conform closely to EMA rules. Even then, Switzerland (which has such a deal) generally gets
new drugs about six months later than the EU.
20 © The Economist Intelligence Unit Limited 2018
A YEAR TO GO:
HOW BREXIT WILL AFFECT UK INDUSTRY
Maintaining supplies
If the UK leaves without any deal at all, then it will have little incentive to stick to EMA rules if they
no longer guarantee EU market entry. That could bring advantages. The MHRA could, for example,
introduce rules to allow innovative drugs earlier access to the UK market. Or it could loosen the rules
on clinical trial data, which are becoming more restrictive in the EU, in order to lower research costs.
The situation is similar for the medical equipment industry, with the added twist that the EU has just
started implementing a 2017 directive that will overhaul medtech regulation. Again, the UK will have to
make a decision between staying aligned and opting for greater flexibility, which could bring benefits in
terms of innovation.
The NHS as well as exporters will be affected by these decisions. Although the UK runs a trade
surplus in pharmaceuticals globally, it runs a £2.4bn trade deficit with the EU. That means many NHS
patients rely on EU medicines. Higher trade barriers, possibly combined with another fall in the pound,
could push up medicine costs sharply while patients may find it hard to get particular medicines from
EU suppliers. People suffering from rare diseases could be particularly affected.
Awareness of all these problems has prompted the government to include life sciences among the
five key sectors for which it has drawn up an industrial strategy. A sectoral deal, agreed in December
2017 after a consultation with the industry, will seek not only to protect the UK’s position in this area but
to enhance it. As with NHS funding, however, much will depend on whether the money and the will is
there to support the strategy.
A bright side
These dire predictions may seem overblown. After all, in the short term the UK automotive sector
benefited from the Brexit vote and the resulting drop in the pound. Although the cost of imported
cars and components rose as the currency fell, UK exports became more competitive globally. UK
production, sales and productivity all hit record highs in 2016. Exports to the US and China, which are
already the UK’s biggest single-country export markets, rose particularly rapidly.
In 2017, however, the picture dimmed somewhat, as UK vehicle production and exports stalled
once the pound stabilised. UK vehicle sales also slumped, with a particularly rapid decline towards the
year-end. We do not expect a recovery in sales until 2020 even if the UK gets the expected Brexit deal.
If the UK gets no deal, then we expect that recovery to be very weak as incomes fall, prices rise and
consumer confidence wanes.
What to do?
The problems are clear; the solutions less so. The SMMT, the BEIS and most carmakers want a special
deal for the car industry—preferably an FTA, but at a minimum, an agreement to keep the UK aligned
with EU rules on vehicle safety, emissions, specifications and future technologies. They would also like
a deal on automotive sector immigration, to allow the industry to keep on recruiting EU nationals with
the necessary skills.
The government is unlikely to pay too much attention to this last request: the automotive industry
is not alone in needing skilled labour, and lowering immigration is among the core aims of Brexit.
However, the industry’s warnings about trade have already sparked a positive response. In her Brexit
speech on March 2nd, Mrs May, suggested that sectors such as automotive, which rely on EU trade, will
need to stay aligned with EU rules.
But the UK cannot decide this unilaterally; its producers will need an EU-recognised certificate to
say that vehicles are cleared for sale in the EU. So far, the EU has given no hint that it will agree to this,
let alone to an FTA for automotive. But German carmakers are keen to keep access to the UK market,
which accounts for a fifth of their exports, so some compromise may be possible. The Volkswagen
Group alone accounts for a combined 20% of the UK market, even though its only UK plant is a Bentley
one in Cheshire.
Global prospects
UK's automotive trade with the EU
(£ m)
Exports to EU Imports from EU
40,000 40,000
35,000 35,000
30,000 30,000
25,000 25,000
20,000 20,000
15,000 15,000
10,000 10,000
5,000 5,000
0 0
2013 2014 2015 2016 2017
(Q1-3)
Source: UK Office for National Statistics.
If there is no EU deal, the UK could in theory take advantage of its regulatory freedom to start loosening
regulations on vehicle emissions, fuel economy and other areas. After all, carmakers often complain
that EU regulations are too onerous and eat into their profits. However, the government seems to
be heading in the opposite direction; its industrial strategy pinpoints the development of ultra-low
emission, connected and autonomous vehicles as a priority, which suggests that it will want to keep up
the pressure on the industry.
As for trade, the UK’s chances of finding markets elsewhere are limited without an EU deal. In theory,
it can strike FTAs with the US, China, India or the new Trans-Pacific Partnership (TPP) of 12 Pacific
Rim countries. However, the UK’s supply chains are so integrated with the EU that such a deal would
be difficult. Of the components fitted in an average UK car, 44% are currently sourced from within
the country, according to the SMMT, below the 60% usually required for FTAs. Take into account the
components that go into those components, and the UK’s share falls to around 25%.
With regulations, the UK is far better negotiating FTAs as an EU-aligned country—unless it is
prepared to adopt US or Chinese regulations. A unique set of UK rules would simply add complications
for volume carmakers, which need to minimise the amount of variation in their vehicle platforms. The
only exceptions may be in low-volume sectors, such as ultra-luxury cars, where EU alignment is less
important.
Brexit breakdown
Take trade first. Even if the UK signs a wide-ranging FTA with the EU as we expect, trading consumer
goods and intermediate materials between the two jurisdictions will be more costly and complex
than before—at the very least because of non-tariff barriers. Much depends on how difficult the
requirements for border inspections, such as phytosanitary checks on plant matter, will be.
Indeed, when it comes to food and farming, which contributes over £100bn (US$140bn) to the UK
economy, domestic farmers produce under two-thirds of the UK’s food. The rest is imported, mainly
from the EU. Therefore, like other manufacturers, food industry players fear losing access to essential
inputs that are not readily available at home. Preserving this ease of access is a priority, not least
because it also affects trade with third parties with which the UK trades under EU treaties.
Arrangements for the border between the UK and the Republic of Ireland are another cause of
concern. UK-based food producers are among those campaigning vociferously to keep Northern
Ireland’s border free of tariffs and barriers, although it is not all bad news for the UK food industry.
Coca-Cola, for instance, has hinted that it may need to move its operations out of Ireland if tariffs are
imposed on exports to the UK. The UK is the biggest market for Irish farm produce, with nearly 90% of
Ireland’s fruit and vegetable exports heading there.
As with Coca-Cola, several companies are being forced to reassess investments in their supply
chains. Some manufactures that count the UK as a key market will be forced to shift production
there. However, for those without factories in the UK, or with smaller market shares, costs could be
prohibitive. The harder the Brexit, the harder the choices.
30,000 30,000
31,878
29,208
28,293
25,000 25,000
27,493
27,581
25,866
25,256
23,425
20,000 20,000
22,556
21,404
15,000 15,000
14,043
13,159
10,000 10,000
11,887
11,800
11,937
11,669
11,793
11,116
10,150
9,764
5,000 5,000
0 0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: UK Office for National Statistics.
A second large concern is the looming end of freedom of movement between the UK and the rest of
the EU. Around a quarter of the UK’s workforce in food and drink manufacturing, or nearly 100,000
people, come from elsewhere in the EU, according to the Food and Drink Federation, a lobby group.
The inflow is certain to slow: concerns over migration were, after all, a main reason that UK citizens
voted to leave the bloc. A stricter visa regime looks all but inevitable, and the supply of workers is set
to be tighter in sectors ranging from fruit-picking to logistics. Wages will need to rise to attract enough
local staff to meet demand, inflating salary bills as well as consumer prices.
A third large unknown is the state of regulation and oversight, including the potential need for
border checks noted above. Such new requirements would cause cost and logistical headaches.
Admittedly, in some areas, efficiency gains should follow from leaving the EU, as a result of being
outside of the Common Agricultural Policy, for example. UK farmers will be able to alter prices more
quickly in future (although some will suffer from receiving lower subsidies). At least in areas such as
food safety, standards are already set internationally. Yet imposing a different set of rules in spheres
such as consumer protection and quality would make doing business in the UK more onerous for
companies offering similar goods and services both there and in the EU.
Forecasting Brexit
Given the uncertainties involved, gauging the effects of Brexit is difficult. What is clear, however, is
that the impact will vary according to the form of departure. Different parts of the retail and consumer
goods sector will be affected to varying degrees, but almost any form of Brexit will have negative
consequences.
Our core forecast is that retail sales volumes will contract slightly in 2018-19 as Brexit talks lay bare
the UK’s weak bargaining position. Slower economic growth and a tougher jobs market would further
rattle consumer confidence. We forecast that an expected retail sales recovery in 2020 would be more
26 © The Economist Intelligence Unit Limited 2018
A YEAR TO GO:
HOW BREXIT WILL AFFECT UK INDUSTRY
feeble under a hard Brexit than it would under our baseline scenario, owing to a weaker pound and
higher import tariffs on goods from the EU.
A final worrying factor under a hard Brexit is inflation, which will be faster, as our forecasts show.
More expensive labour and imported materials would cause a steep fall in household spending and
retail sales in 2021-22, when the latter will contract by around 0.5%. A softer Brexit would produce a
better outcome. Even then, growth in household spending and retail sales will be far from strong.
However, the effect of price rises, particularly in the food sector, means that food retail sales would
be much more robust under a hard Brexit than non-food sales. Demand for food is relatively inelastic,
so as import prices rise, domestic manufacturing should also gain pace. Yet exports of food stand to be
hit by especially high tariff and non-tariff barriers under WTO conditions.
Connected to Europe
Trade is perhaps the least of the issues, although its importance is far from negligible. The UK is a net
importer of oil and gas, with Norway (a member of the European Economic Area) a key supplier. This oil
and gas trade is unlikely to be directly affected by the UK leaving the EU. Nevertheless, any disruption
to supply chains resulting from a hard Brexit could have an indirect impact on the natural gas sector in
terms of operational and investment costs. There are four gas pipelines that connect the UK with the
continent.
A bigger issue will be trade in electricity, with the UK’s dependence on imported electricity from
Europe on the rise. There are currently four existing interconnectors that facilitate the import of
electricity to the UK from Europe, with a total capacity of 4 GW. In the first three quarters of 2017
electricity imports accounted for over 5% of the UK’s electricity supply. According to National Grid, up
to a further 13.6 GW of contracted interconnector capacity could be added, with 11 projects at various
stages of the planning or construction phase. The UK will be leaving the EU, but its connectivity with
the European electricity market is set to deepen.
Brexit also raises issues for the management of the single energy market (SEM) that exists
between the Republic of Ireland and Northern Ireland. The SEM has been in existence since 2007,
and will become the integrated single energy market (ISEM) in May 2018, bringing in a new wholesale
electricity market arrangement for all the island of Ireland. It, in turn, is based on the integration with
EU electricity markets. (A crossborder electricity interconnector between Northern Ireland and the
Republic of Ireland was approved in January 2018.)
Integration regulations
Energy companies have almost universally recommended that the UK maintain its full participation
in the IEM, as well as the ISEM. It makes no sense, they argue, for the UK to reverse course on its
integration of the European and Irish energy markets—doing so would push up the cost of energy and
make transmission less efficient on all sides.
But staying in the IEM is unlikely to be possible if the UK leaves the single market and the jurisdiction
of the European Court of Justice (ECJ). Without that framework, the UK may not be allowed to retain
membership of some of the bodies that govern the IEM. These bodies include the European Network of
Transmission System Operators (one each for electricity and gas), which in turn are monitored by the
Agency for Co-operation of European Regulators (ACER).
The UK has faced a similar dilemma over Euratom, the body that governs within Europe the
transport of nuclear materials and the handling of waste, and performs research. However, in this case,
the UK government has already decided to leave Euratom because the organisation is subject to ECJ
jurisdiction. It appears confident that it can establish an alternative governing structure—one that its
European partners will accept—although its success is far from assured.
involves accepting ECJ jurisdiction. The UK may need to establish its own scheme, and then link it to the
ETS, or to re-evaluate its own carbon pricing policies to fully take its place.
The UK’s departure from the EU will also affect the chances of the remaining 27 member states
meeting the EU’s 2030 climate and energy targets. These include cutting emissions by 40% from 1990
levels—so far the UK’s progress in this area has been a big contributor to the overall EU goals. Germany
can take up some of the slack but the pressure on coal-dependent countries such as Poland to clean up
their act will increase. France may also come under pressure not to retire its nuclear plants too quickly.
In short, the EU may find it misses the UK as much as the other way around, when it comes to the
energy sector. The UK has been instrumental in laying the groundwork for a liberalised and integrated
energy market in Europe in the first place, as well as pushing for progress on climate change. The
latter may not change after Brexit, but it is hard to see how the UK can stay part of the IEM and other
organisations if it wants to leave the jurisdiction of the ECJ.
In the meantime, uncertainty about the market environment may also deter much-needed
investment in the UK’s generation capacity and other infrastructure, such as electricity connectors. This
may ultimately lead to higher energy prices for the UK consumer.
Freedom to roam
Even if the UK does align all its telecoms legislation post-Brexit, much will depend on the powers of
the UK regulator, Ofcom. Take the eradication of roaming charges, which has capped the amount
that EU operators can charge each other for using their networks. Greeted with enthusiasm by EU
consumers, because it makes using mobiles abroad much cheaper, the caps have eaten into operators’
margins. Operators argue that the loss of roaming revenue has threatened investment in crucial mobile
infrastructure, including the development of next-generation 5G technology.
Even if the UK decides to transfer the current roaming arrangements into UK law using the EU
Withdrawal Bill, it would not be enough. Last April another House of Commons select committee,
the European Scrutiny Committee, concluded that although UK authorities can cap the wholesale
rates that UK operators impose on EU operators for use of their domestic networks, they would be
powerless to ensure that wholesale charges were capped for UK consumers in Europe. As a result, UK
operators would be at a financial and competitive disadvantage.
If roaming charges are reintroduced, then Ofcom could compensate consumers by capping other
charges, but only if its powers allow it to do so. That means that the UK would have to diverge from
EU policy on state intervention in retail markets. The European Commission is currently planning to
impose a ban on retail regulation by 2020, but Ofcom argues that such a ban might prevent it from
intervening in the retail telecoms market post-Brexit.
A new framework?
UK's telecoms trade with the EU
Exports Imports
(£ m)
Telecoms equipment Telecoms equipment
Consumer electronics Consumer electronics
18,000 18,000
16,000 16,000
14,000 14,000
12,000 12,000
10,000 10,000
8,000 8,000
6,000 6,000
4,000 4,000
2,000 2,000
0 0
2011 2012 2013 2014 2015 2016
Source: UK Office for National Statistics.
To this end, the UK’s Broadband Stakeholder Group, the government’s advisory group on
broadband provision, has recommended that Ofcom continue to maintain its independence from
government, while enlisting a third party to scrutinise its activity. Such a move, it argues, would allow it
to take an active role in discussions with EU bodies such as BEREC (the Body of European Regulators
for Electronic Communications), whose decisions have a bearing on the UK digital market.
Even then, though, there are questions about the regulatory framework that Ofcom would operate
under. Currently, Ofcom’s regulatory weight derives to a considerable degree from EU guidance,
particularly the EU Regulatory Framework for Communications. This framework is currently under
review, which means that the UK government will have to choose to either mirror the conclusions
drawn, or forge its own way. The same is true with the plans for a digital single market, which are being
rolled out across the EU—and will do so in the future without UK influence.
Non-virtual trade
Regulation is not the only potential sticking point, however. The UK telecoms sector is the largest in
Europe, contributing £30.2bn (US$42bn) to the UK economy. Although much of that comes from
telecoms services, there is also a significant trade in telecoms components and equipment. The EU is
by far the biggest recipient of UK telecoms exports, as well as a source of telecoms imports, at £3.8bn
and £5.1bn in 2014, respectively.
As well as working with the EU to try to avoid threats to this trade, the UK will also need to nurture
closer ties with a range of international organisations, including the WTO and the International
Telecommunication Union. This will help the sector to maintain a robust trading position, while giving
the UK a say in international telecoms policies that will undoubtedly have an effect on domestic
industry.
On the labour side, the government’s industrial strategy aims to avoid the skill shortages that are
likely to appear after Brexit, when it becomes harder to recruit EU workers. Training initiatives will
help to ensure that UK workers have more innovation skills, but the UK will still need access to foreign
workers. This will give the UK the ability to pursue R&D in a range of burgeoning technologies, such as
the internet of things and next-generation 5G connectivity. Maintaining a consistent funding stream for
these technologies will also be essential once the UK’s access to EU funding for the digital single market
comes to an end.
Telecoms is not one of the sectors picked out as a priority by the government, so it is unlikely to
figure highly in the EU negotiations. That means that the telecoms sector needs to face the risks
and opportunities of Brexit head-on, without waiting for a special deal. On all of the issues at stake,
however, there are still more questions than answers. The same, unfortunately, is true for all of the
sectors covered in this report.
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