Brexit me if you can: UK companies to suffer the most
Ludovic Subran
Chief Economist at Allianz, Senior Fellow at Harvard University | Economics, Investment, Insurance, Sustainability, Public Policy
Politicians and pundits discussing a possible British exit from the European Union tend to use big words. “Dire consequences”, “Chaos in the City”, and “Splendid Isolation” make the media rounds. It is more complicated that that.
At this stage, it looks unlikely that Britain will vote to quit the EU (a referendum is due before the end of 2017), and it is not Euler Hermes' core scenario. But the debate surrounding Brexit already unleashes a vicious cycle. It increases uncertainty, which affects sentiment and might delay investment decisions. GDP growth in the UK is expected to slow down to +2.1% in 2016 and +1.9% in 2017. 0.1pp in this slowdown can be explained by lack of forward visibility; a similar effect was measured during the last round of elections.
We decided to analyse in a more sober way (using a partial equilibrium model) what a Brexit would mean for British companies. Our special Economic Insight report, titled ‘Brexit me if you can’, analyses why – and in what ways.
So what if Brexit proponents manage to win a majority? Well, companies’ turnover growth could be halved, if a Free Trade Agreement (FTA) with the EU is signed. They could contract without one.
Three transmission channels explain this daunting effect on companies: (i) direct export losses; (ii) falling margins due to higher input and financing costs; and (iii) divestment risk.
First, The Economic Research team at Euler Hermes estimates that Britain could lose GPB 30 billion worth of exports if no free-trade agreements with the EU were in place post EU-exit. Even if trade does pick up, it could take up to 10 years to fill the gap, even if trade with other destinations pick up - due to export structure mismatch.
Second, profit margins could fall by up to 2 points on the back of higher input costs and tighter financing conditions. And although the financial sector will pay the highest price, it will not be the only industry to suffer. The automotive, machinery and equipment, chemicals, agrifood, textile and energy sectors would also be affected.
Third, if European and international companies realized that London no longer serves as a comfortable gateway, they could not be faulted for taking their business elsewhere. The result: up to GBP210bn of foreign investment could be wiped out in the four years following the referendum.
Diminished trade opportunities and a decline in the City of London’s role as a premier hub for global finance would pose serious risks to the private sector in the UK. It is up to the people to choose and this post does not intend to take sides, be a scaremonger or hide the positives. It gives some ballpark figures on direct effects and confirms that in a hyperdependent world, cutting threads means rebuilding your entire canvas: not easy, not insurmountable.
Ludovic Subran, Chief Economist
Euler Hermes
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8 年I share with you and your connections an article I posted yesterday: "The revolving door: Four reasons why the UK won′t really exit the EU building" https://www.dhirubhai.net/pulse/revolving-door-four-reasons-why-uk-wont-really-exit-eu-rodas-martini?trk=mp-author-card
Installation Artist
8 年This is a worrying topic, I know nothing about business or economics. I do understand the concept of accepting life being "not fair" but I do not believe that, that means we should not try to make life fairer than it seems to be. If I get to vote on the in or out question. Firstly I will be glad to turn out to vote because I have got one, secondly I will adapt my ideas to which ever side wins because that is how we live here although, I don't think there is enough vote casting especially when you consider how easy it could be now. Thirdly I will have to, just like anyone else in a so called democratic system, listen to people spouting on about how expert they are and how they are interested in my and my children and grandchildren's welfare. I rarely believe anything that I hear these days but I will have to make a judgement and accept the consequences. I am a socialist (that means that I like people) because of the combination of when and where I come from including the religion that I was indoctrinated into and all of the things that have happened to me or the things that I have witnessed or done, good or bad in my life. I believe that we are all working hard to get it right and we have to trust in that. It is all we have got. smiley smiley kiss kiss
Principal Electrical Engineer at Simplexity Product Development, Inc.
8 年Does the analysis cover increased trade with non-EU countries (the links in the article appear to be broken)? On exit, the UK would be free to set up its own free trade agreements with other parts of the world, which at the moment it cannot do. Don't underestimate the power of the British Commonwealth as an alternative to European trade. For all the column inches by financial people about whether Britain would be better off in or out, in actual fact none of them know anything with any degree of certainty what would happen after a vote to leave. European leaders are outwardly looking the other way and hoping that it won't happen because they have no clues what to do either. Much of the "you'll be worse off if you leave" gets written off as scaremongering and if anything, may harden attitudes and encourage people to vote to leave.
ILS Engineer
8 年Sounds like Ludovic has a conflict of interest if you ask me. A rather unbalanced report, "if", "should", "could". Sorry for not caring if a few parasites in the city of London will loose out if i get something which resembles a bit more of a democracy back again. I do use the term democracy lightly though.. Yes, i am fearful of the centralisation of power.
Statistician, Big Data, Little Data, No Data
8 年I am happy to see that the folks across the Pond are also worried about stuff.