Brexit Battles

Article 50 Is No Formality

CEOs and shareholders will all view this as the turning point.
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We are days away from Article 50 becoming a reality. It's hard to see this as a surprise. The text will be short and prosaic and the reaction in financial markets equally so, judging by Tuesday's fall in the pound that predictably lifted U.K. equities.

But as the days give way to months and years, CEOs and investors are unlikely to see this as just a formality. Triggering the exit process from the European Union will start a two-year negotiating clock that those planning long-term U.K. investments will find hard to ignore.

The sky isn't going to fall in, the economy won't suddenly implode -- we know that. But the willingness of companies to invest hasn't rebounded strongly since the June referendum, according to data compiled by the Bank of England.

Investment Blues

Despite upbeat economic data, investment intentions have yet to rebound

Source: Bloomberg/Bank of England

And profit warnings are at their highest since 2008 in the FTSE Support Services sector, a key barometer of business spending, according to a report by EY, an accounting firm.

It's hard to see that triggering Article 50 will suddenly inject a dose of optimism, especially now that consumers are also facing headwinds in the form of higher inflation.

For those that do want to invest, the clamor for guarantees and clarity from the U.K. will surely rise. Negotiations are going to be out in the open and it won't be so easy for the government to ask CEOs for patience. Theresa May has said no deal is better than a bad deal -- but that is hard to square with the latest view from automaker Nissan Motor Co., which recently said it may "adjust" its U.K. presence in the event of a bad deal.

Companies are now putting a price on "hard" Brexit. Nissan thinks it is 500 million pounds ($607 million) of profit, while investment bank Credit Suisse Group AG puts it at $750 million of revenue.  We will no longer be in a phony war.

The Cost of A Bad Brexit

Companies are putting a price on what's at risk in case of a "hard" Brexit

Source: Company statements. Nissan estimated on profit, Credit Suisse on revenue.

And on a staffing and morale level, CEOs have a new headache in the form of the 2.3 million EU nationals working in the U.K. Parliament has scrapped an amendment that would have committed to defending their rights. That's not good: A survey last year found more than half of companies thought residency guarantees for EU workers would be good for business. We now have a situation where millions of workers are politicized, with their future tied to Article 50 talks whether they like it or not.

EU Nationals: Still Waiting

Most companies think residency rights for EU workers would be good for business

Source: British Chambers of Commerce survey of U.K. companies, conducted July 2016.

Obviously, political uncertainty is not a U.K.-specific phenomenon. Elections in France and Germany could have far greater repercussions for Europe than import tariffs on U.K. automobiles. And negotiations are just that -- negotiations. Extensions and transitional arrangements can be agreed if the willpower is there.

But imagining a disappointment-free deal for British CEOs, employees, investors and customers in the space of two years nonetheless requires a big leap of faith.

Whether Theresa May pays a price to keep as much of the status quo as possible or overhauls the economy to create a new one, there's no going back now. And in two years time, this will be the month CEOs remember as the turning point -- whatever the outcome. This is no formality.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Lionel Laurent in London at

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    Edward Evans at

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