“We already miss you. There is no reason to pretend this is a happy day. Thank you and goodbye,” Mr Tusk sincerely said in his statement to Britain last week and life quickly has moved on. He also said that he will have proposal for Brexit negotiating mandate, there is and it has already pushed back on our initial demands of parallel negotiations. Divorce first – sorting out the money, citizens’ rights and Ireland’s borders – before you can start talking trade.
There are also a number of ‘red lines’ from paying what we owe, anywhere from £60bn to nothing, guaranteeing citizens rights, no sneaky side deals, or not turning ourselves into a Singapore type tax haven to attract future business. But like any negotiation, it’s a game of understanding what the opposition wants, versus what we’re prepared barter.
What we need to do is to stop the kidding, pulling the wool and be honest about what WTO deal, or a ‘worst case scenario’ might mean. One of the failings of the EU is their tortoise like approach to closing a deal. Canada signed – at the 11th hour, after seven years of talks – but still China, India, Brazil and the US are still to put ink to paper with Mr Tusk or any of his predecessors over the last few decades. Yes, the EU is used to negotiating, but nothing happens in a hurry.
The EU are already using our decision to leave as a way of closing ranks and protecting the ‘family members’, which could only make negotiations harder in that our ability to pick off or lobby key member states will receive a blunt ‘no’.
Funnily enough a large part of the argument back in June was about how the EU was a crumbling and fractious super-state. Le Pen was a ‘shoe in’ in France, Wilders was going to overturn a placid Dutch parliament and Italy was on the verge of rebellion. None of that has materialised and Europe is economically starting to pull it’s socks up.
Conversely, the UK is split down the middle as regards Brexit, the SNP’s banging the referendum drum and there’s an issue over Ireland. If anything, Brexit has brought the EU closer together whereas we’ve become more divided.
Over the coming weeks, we’re likely to see a considerable amount of posturing. A little like the media fuelled hype at a weigh-in for a boxing contest, full of headline grabbing words, as both sides try to establish a higher ground.
The Prime Minister spoke about ‘ambition and an opportunity’ but accepts Brexit will carry consequences for the UK and the sooner businesses get further clarity the better. Another six months dealing with the divorce will only compound decisions such as investment, access to labour or those who can afford to, relocating of departments or factories.
So, what has happened to the economy and some of the key sectors CMF Capital is heavily involved in supporting since we fired the Brexit gun last Wednesday?
Economically Defying the Odds……
Economically, we’re still robust. Our trade deficit is narrowing and the UK economy grew by more than previously reported in the final three months of 2016, according to the latest official estimate. Gross domestic product (GDP) increased by 0.7% up from 0.6%.
The upward revision is mainly due to the manufacturing industry having done better than thought. The ONS cut its estimate for growth in 2016 as a whole to 1.8%, down from the 2% it forecast last month. There are hints that Brexit is hitting business confidence, but we are also seeing bold decision making and a ‘business as usual’ attitude from many leaders we speak to.
Within the finance and insurance sector, we’ve already started to see the first signs of relocation. Lloyds are sending a special ops unit over the Brussels, Goldman’s and Morgan Stanley (amongst others) have also ordered bubble wrap and packing crates. The issue of ‘Passporting’ rights is key, but the banks are in a strong position in terms of lobbying the government as to what a future ‘City of London’ could look like. There are pro’s and con’s here – we’re the financial capital of the world and the PM will want to protect the jewel in the economic crown.
For our manufacturing industry things are more uncertain
The EU is currently the UK’s biggest trading partner. * In 2015, 44% of the UK’s goods and services were exported to the EU, while 53% of our imports came to the UK from the EU. In the same year, UK exports to the EU were valued at £223.3 billion, while UK imports from the EU stood at £291.1 billion.
Possible restrictions of the free movement of people within the EU will create issues with sourcing labour in factories and other parts of the supply chain. But it is access to free trade which could tip the scales. Our world leading products will always be in demand but they must remain price-competitive. WTO tariffs of anywhere between 4-11% is a hit when margins are already tight.
Is agriculture due for the biggest shake up?
The UK has only committed to keeping EU farming subsidies – worth £3billion a year – until 2020. However, two-thirds of farmers voted to leave. Perhaps given the geography (i.e. outside of the major cities who tended to remain) but also because they feel EU subsidies are unfair.
Sixteen of the top 100 producing farms are owned or controlled by individuals or families who feature on the 2016 Sunday Times rich list. Struggling or poor yielding farms are also propped up by EU grants. Your average, hardworking farmer believes that a cull to the bottom end will drive up prices to a fairer level. That theory relies on the supermarkets treating suppliers better than they do at the moment.
We are seeing a younger generation embracing innovation, or ‘precision farming’ and also diversification especially towards renewable energy investment. It could be Brexit will provide the positive changes our agriculture industry needed as the fittest not only survive, but become more productive.
Construction still driving forward
House building has slowed to a six-month low as costs have soared, due largely to a weaker pound. However, output in the construction industry overall has risen for the sixth consecutive month in February, led by civil engineering.
Cranes still adorn city skylines, everyone is aware of the need to build more affordable housing and there are a number of major government projects moving forward. It is crucial the Chancellor continues to invest behind the UK’s needs and one also gets a real sense that the regional powerhouse strategy is delivering.
Conversely, some firms say that rising input costs have influenced decision making and have led to delays in contracts being completed and the planning process is still painfully slow. But, the two real issues in the construction industry is access to skilled labour and access to investment.
Britain’s tech entrepreneurs have one chief concern
Europe’s tech capitals are fighting to be the Silicon Valley of Europe, with Berlin, London, Paris and Lisbon among others vying to be the go-to location for tech on the continent. There were some initial concerns that Brexit would pass the baton away from London, with a wave of start-ups opting to relocate in the wake of the vote citing access to recruiting the most talented professionals.
Since then, Silicon Valley giants have moved to cement Britain as a clear front runner. Google, Facebook, Microsoft, Amazon and Apple all announced major investments in the UK, with the promise to bring thousands more jobs to the country.
Added to this, large tech companies such as Google, Apple and Facebook have had run-ins with the European Commission in recent years while the UK has generally been more supportive, which could further boost Britain. Concerns that start-ups based in Britain would choose to leave the country have proved unfounded.
For pharmaceuticals, there are funding and regulatory questions
A hard Brexit could significantly increase the cost of getting new treatments approved by regulators. Currently, developers can sell drugs across the single market after getting the go-ahead from the EU Medicines Agency. Unless a common system is agreed we might have to set up our own watchdog meaning more red tape for the sector.
Science funding is one of the few areas where the UK is a net beneficiary of EU membership – to the tune of £3.4bn between 2007 – 2013. Scientists also need to collaborate and share knowledge, vital for making people better and safer. It is in both sides interests – if nothing more than the basis of humanity – that ongoing relationships are seamlessly maintained.
Where Does Green Energy Stand?
Our renewable energy output is increasing at an exponential rate. In 2015 alone, 147 gigawatts of electricity came online. This is the largest annual increase in the history of the sector. Almost a quarter of our energy now comes from renewable resources which is strong progress.
The UK is tied to EU energy and emissions targets and by leaving the union there is less of a stick to be beaten with. However, we’re also locked into global targets and should be doing more to lead the way in clean energy. Being an island, we’re able to leverage wind, solar, tidal solutions along with a fast-growing biomass and AD industry, this is a sector that will continue to grow despite of confused government policy.
Tariff free access the key for UK Automotive Industry
Despite a 17 year high in production, Britain’s flourishing car makers have warned that the UK’s departure from the European Union poses the “biggest threat in a generation” to the £72bn-a-year industry according to industry bosses.
More than half of the 1.7m cars rolling off UK production lines each year are exported to Europe and trade body the Society of Motor Manufacturers and Traders has warned of the risks of failing to secure a tariff-free deal when we depart from the trading bloc.
Government has committed to creating and supporting the right conditions for our industry to be successful. That means certainty in our relationship with our biggest market, tariff-free and open borders so products, parts and investment can flow freely.
The car industry is one of Britain’s biggest exporters, responsible for 12% of the country’s goods exports, and there are concerns that without a trade deal being hammered out or a transitional agreement, a 10% levy could be slapped on cars.
It is not just finished cars that would face problems: the average car has about 30% UK-made components, with the rest coming from abroad. Current customs arrangements mean these parts move across borders easily without levies or paperwork, but this freedom of movement could be under threat.
The bumper of a Bentley Benayga crosses the Channel three times during production. One would hope, in first class.
