Britain’s Economy Is Flying Blind 100 Days After Brexit Voteby and
Lack of clarity on Brexit plan is affecting companies
Investment intentions have weakened this year, BOE says
Pubs, retailers, automakers. Name the business and it’s likely they’re looking for an answer to what Brexit will actually mean.
Almost 100 days since the U.K. voted to leave the European Union, firms are still in the dark. Prime Minister Theresa May has offered little insight into her exit strategy, leaving executives to make decisions on investment and hiring with no clarity on what the business environment might look like, or how easy it will be for the U.K. to continue trading with the bloc of 500 million people.
“What is difficult today is the uncertainty,” Nissan Motor Co. Chief Executive Officer Carlos Ghosn said in an interview Thursday with Bloomberg Television. “What are going to be the conditions of the Brexit?”
Nissan built one in three cars in the U.K. last year and about 80 percent of its production there is exported. A further reminder of the risks came on Thursday when Capita Plc, the services company that runs London’s congestion charge, said it will miss estimates because of a slowdown in some businesses since the EU vote. Part of that was linked to “continued delays in client decision making,” a factor the Bank of England has also highlighted as a threat.
Such uncertainty looms over an economy that has proven more resilient than anticipated since the June referendum. The U.K. is facing some form of scaled-back relationship with its biggest export market, and economists surveyed by Bloomberg expect the pace of expansion to more than halve next year.
“The government doesn’t have a plan, and until it decides, it’s really hard for anyone to prepare,” said Thomas Sampson, a professor at the London School of Economics. “In the short run, uncertainty can cause some decline in activity, but that’s a separate issue from what will happen in the longer run once we change our relationship with the EU, which I’m much more concerned about.”
Instead of an immediate move to withdraw from the EU, the government’s approach has instead been slow and measured. Formal exit negotiations may only start next year and then take two years to conclude, so any clues about the new relationship have been pushed into the distance.
Brewer Shepherd Neame says Brexit “presents a degree of legal and economic uncertainty” and it’s “mindful of the possibility of a slowdown.” Home-improvement chain Kingfisher Plc said it hasn’t seen a direct impact on business yet but has formed a “working group” to monitor developments. Others are turning to external help: demand for consultants is up 10 percent compared with a year ago.
It’s not just domestic companies considering their options. German airline Deutsche Lufthansa AG is examining whether it may need to vary frequencies and aircraft types on U.K. routes as demand shifts following the Brexit vote.
Crucial to the outlook will be whether the U.K. can negotiate the “bespoke model” that May wants in which Britain maintains access to the single market and restricts migration, according to Bloomberg Intelligence economist Niraj Shah. But that could raise red lines on both sides, hampering agreement or even leading to a so-called hard Brexit where Britain leaves the single market entirely.
“The reality of the protracted process of withdrawing from the EU means we still know very little about the nature of our future trading arrangements,” Bank of England Deputy Governor Minouche Shafik said at the Bloomberg Markets Most Influential Summit in London on Wednesday. “This uncertainty is weighing on prospects for business investment.”
That’s not just talk. The BOE sees investment plunging almost 4 percent this year and 2 percent in 2017. Economic growth may cool to 0.8 percent next year, which would be the weakest performance since 2009.
Brexit angst has sent the pound tumbling 13 percent against the dollar since the referendum, making it the worst performer among major currencies tracked by Bloomberg. The depreciation has provided a fillip to U.K. exports, but is also set to boost inflation and put a squeeze on consumers.
The lack of clarity poses a challenge for policy makers. According BOE official Kristin Forbes, the central bank may even be miscalculating the the overall impact of uncertainty on the economy.
The central bank, which cut interest rates and restarted its asset-buying program this summer, raised its near-term growth estimates, though it won’t draw inferences for the longer term until it publishes a more detailed analysis on Nov. 3. That’s three weeks before Chancellor Philip Hammond’s fiscal statement that may include some form of modest giveaway.
“We expect the economy to slow more toward the end of the year and maybe next year also,” said Athanasios Vamvakidis, head of group-of-10 currency strategy at Bank of America Merrill Lynch, in an interview with Anna Edwards and Manus Cranny on Bloomberg TV. “Perhaps the worst is ahead of us, and indeed the uncertainty will effect the economy.”