Almost 70% of the slowdown in UK investment might be down to Brexit. Whatever path is taken, businesses are going to be left in the fog.
Not since the ‘Great Smog’ of 1952 has London been shrouded in such dismal gloom. British politics are in disarray, as lawmakers can’t agree when and under what conditions they’d like to leave the EU. The “deal” Theresa May has been negotiating for two years has been rejected by the House of Commons not once, but twice. Most politicians favour a negotiated Brexit, allowing for a transition period, but Brussels is unwilling to go further than what it offered May.
A delay to the March 29th departure date looks inevitable as the options of a second referendum or general election become ever more tempting. And yet, the risk of a disorderly Brexit remains (even after Members of Parliament voted against that possibility on Wednesday night), as the chief EU negotiator Michel Barnier has warned.
Whatever the political outcome, there are no good options for the UK economy. Were Brexit to occur without a deal, it would plunge Britain into chaos and send ripples across the world’s financial markets. But even in the more likely outcome of an orderly departure—perhaps after a postponement—the uncertainty that has held back British output in recent months would simply continue. Businesses probably won’t get the answers they crave for several years yet.
There is mounting evidence that the country’s economy has slowed since the Brexit vote. National income rebounded somewhat in January, but this followed a string of weak data toward the end of last year. Growth was a poor 0.2% in the three months to January, according to the Office for National Statistics. The composite purchasing managers’ index, a measure of economic activity, points to growth of 0.1% in the first quarter of 2019. The Office for Budget Responsibility (OBR), Britain’s fiscal watchdog, predicts that the economy will expand by 1.2% this year, down from a 1.6% forecast five months ago.
One negative force is the decline in investment. Jonathan Haskel, the newest member of the Bank of England’s Monetary Policy Committee, said in a speech this week that post-referendum business investment had fallen relative to its historic trend and compared to the other G-7 economies. Had it grown at the same pace as the median G-7 country (excluding the UK), it would have risen 2.9%. Instead, it fell 0.4%. This suggests Brexit accounts for nearly 70% of the investment slowdown.
Anecdotal evidence backs this up, showing the impact on people’s livelihoods. Nissan Motor Co Ltd. is shifting the production of some cars—the X-Trail sport utility vehicle and two Infiniti models—away from Sunderland in northern England. Honda Motor Co Ltd. is to close down its flagship UK plant in Swindon. While the companies insist these decisions aren’t purely down to Brexit, it is ludicrous to think that Britain’s attempt to leave not just the EU, but also the single market, isn’t affecting foreign investors. One hope is that this is temporary. Once Britain actually leaves, so the optimists’ tale goes, business will know what to expect and will resume buying equipment and machinery. Indeed, the OBR has lifted its forecasts for economic growth in the next two years, assuming a deal is done. The economy is now expected to expand by 1.4% in 2020 and 1.6% the year after. That optimism is misplaced. There are three scenarios for companies in the UK, and none look pretty.
First is a catastrophic exit, whereby Britain leaves the EU without a withdrawal agreement. From pharmaceuticals to aviation, it is hard to think of a sector that would not suffer. Companies may need to spend to deal with the disruptions, but this will pale by comparison with the reduction in domestic and foreign demand. The Bank of England may relax monetary policy to deal with the slump, but a collapse in sterling and supply constraints could cause inflation to spike, which would require a monetary tightening. How do you square that circle?
The Bank has also asked lenders to triple their holdings of liquid assets, according to the Financial Times, but weaker banks would still be vulnerable. In a no-deal Brexit, a credit crunch would be a near certainty.
The second scenario is an orderly exit, with some form of withdrawal agreement. Yet this won’t answer the fundamental question about the future EU relationship. With the dominant Conservative and Labour parties riven by in-fighting, who knows what they want Brexit to be like? And, anyway, which party will be in power? How much will the EU concede? And what will Britain’s trade deals with the rest of the world look like?
Even if Britain asks for more time to make up its mind, that won’t clarify anything for British business. The same could be said for a second referendum—the third scenario—which might take a year to arrange and could end up with the same result or inflict even greater political division on the country.
Haskel found that investment in intellectual property products has held up reasonably well since the vote, probably because they suffer less risk of holdups at the border. But a stricter immigration policy post-Brexit, as favoured by May and Labour leader Jeremy Corbyn, would probably force companies in these sectors overseas too. Similarly, many finance firms have set up shop in other EU countries now, and they may start competing with those still located in the UK. Divestment away from Britain may have only just started.
The Brexit referendum was meant to settle the issue of Britain’s relationship with the EU for a generation. But for companies investing in the UK, all it has done is open up an era of uncertainty that contrasts vividly with Britain’s hard-won reputation for boring predictability. The ‘Great Smog’ of London killed thousands, but waned in less than a week. It will take years for the poison of Brexit to clear.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.