Brexit Is a Year Away. Here’s What’s Happening in the U.K.
We’re heading into the final stretch. There will be a transition period after Brexit day, but on March 29, 2019, the United Kingdom will formally cease to be a member of the European Union. It’s what 52 percent of those who voted in June 2016 wanted.
But what does it mean for the country? How are businesses and industries preparing for life after Brexit? And how is the U.K. economy faring?
Bloomberg tracks all of this, all the time: Our custom-built Brexit Barometer takes a daily reading of the health of the British economy, and our teams of specialist reporters follow the latest developments as they happen.
With a year to go until Brexit, we’re taking stock this week and attempting to work out what has happened so far and what to look out for in the year ahead, and beyond. —Adam Blenford
An Economic Burden
After initially shrugging off the referendum—and defying predictions from the government that the country risked falling into recession if it voted Leave—the U.K. economy is becoming increasingly burdened by Brexit, as our Brexit Barometer illustrates. The chart below shows how the barometer has trended lower since early 2015, peaking shortly after the Conservatives won an outright majority with David Cameron as prime minister.
After June 2016, households were initially hit by faster inflation when the pound dropped, and companies are still reluctant to invest and increase wages without more clarity on the future relationship with Britain’s biggest trading partner.
Now that the consumer squeeze is easing—inflation is slowing and wages are gradually picking up—the Bank of England is signaling a series of interest-rate increases. Rate hikes are needed, the bank argues, because Brexit has subtly changed the economy, so the historically sluggish current pace of expansion is still fast enough to stoke prices and keep inflation above target. —Brian Swint
Banks Are Looking for New Homes
The world’s biggest banks aren’t waiting around to see what Brexit deal Prime Minister Theresa May will strike with her EU counterparts. They triggered relocation plans earlier this year to guarantee their new EU headquarters are up and running by the time the U.K. exits.
That’s because EU regulators made it clear they expect banks to establish full-scale, standalone operations inside the trading bloc staffed by significant numbers of both front- and back-office staff as well as senior employees as soon as possible. Most have chosen Frankfurt for their EU trading hubs, but staff will also be dispersed widely across the region.
Banks are trying to limit how many people they have to relocate—and plan to hire locally for most back and middle office positions—but the U.K.’s top banking regulator Sam Woods said as many as 10,000 British-based jobs are at risk on “day one” of Brexit. —Gavin Finch
There’s a Squeeze on Property Prices
Property was expected to be among the industries hardest hit by Brexit, with predictions that jobs would leave London for Europe, hurting demand for office space, stores and warehouses. In reality commercial property demand has held up, thanks in part to fewer banker transfers than expected and the rapid rise of co-working companies like WeWork Cos. The weak pound helped investment rebound with Hong Kong buyers, lured by sterling’s weakness, snapping up a string of large office buildings in the City of London financial district.
Demand for pricier London homes had already been hit hard by tax hikes and high prices after years of soaring values. There are now signs the downturn is spreading from the U.K. capital’s glitziest boroughs to its suburbs as Brexit weakens economic confidence. Other parts of the country could be more vulnerable if growth wanes further in the run-in to March 2019. —Jack Sidders
The Pound Buys Less, and Retailers Feel the Pain
Britain’s retailers have been particularly exposed to the slump in sterling, which pushed up sourcing costs for a sector that’s heavily dependent on imports. The subsequent rise in food prices also hit consumer spending power. That came at a challenging time as wages increased and the sales shifted from stores to online.
Non-food retailers selling discretionary products have taken the biggest hit. Since Christmas there have been a slew of profit warnings and restructurings, all of which was too much for Toys ‘R’ Us U.K. and Maplin, which both collapsed in February.
But it’s the U.K.’s plan to leave the customs union that could have the greatest implications, threatening to disrupt the import of 22 billion pounds ($31 billion) worth of meat, fish, dairy products, fruit and vegetables. J Sainsbury Plc Chief Executive Officer Mike Coupe has warned that leaving the EU without a deal would prompt an unprecedented food crisis. —Sam Chambers
Will Cars Cost More? Will Planes Be Grounded?
The car industry last year suffered its biggest annual slide in sales since the global recession, falling from a record high. Manufacturers have been quick to blame—at least in part—consumer wariness ahead of Brexit (the diesel scandal hasn’t helped either). Carmakers have started to reshape their businesses accordingly: PSA Group’s Vauxhall Motors has cut 650 at its plant in Ellesmere Port near Liverpool, while Jaguar Land Rover is planning to reduce production next quarter. In a worst-case scenario, tariffs could add 2,372 pounds to the cost of assembling a car.
Aerospace manufacturers, though exempt from the potential 10 percent fees faced by the autos sector, have been making noise about the impact of border and customs delays on the movement of people and parts. Airbus, which makes wings at a factory on the border of Wales and England, has warned that it will need to start stockpiling parts if it doesn’t get clarity soon.
There’s a chance that without an aviation deal Brits may be using the ferry for their next summer holiday. Airlines are pleading for a deal that’ll prevent aircraft being grounded the minute Brexit hits. The likes of British Airways and EasyJet think that’s very unlikely to happen—even Ryanair CEO Michael O’Leary, who has been the most vocal about the issue, shares those doubts. Even so, passengers are likely to start seeing Brexit clauses on their tickets in the coming months cautioning that any flights booked will be dependent on the outcome of negotiations. —Ben Katz
The Drugs Don’t Work
Drugmakers are bracing for extra costs, the loss of scientists and research funds, and potential disruption from the European Medicines Agency’s relocation from London to Amsterdam. Among Brexit headaches they anticipate are the need to build new testing facilities in EU countries and to refile for approval to sell drugs that have been on the market for years.
GlaxoSmithKline, Britain’s largest drugmaker, estimates that Brexit-related costs could be as high as 70 million pounds ($100 million) over the next two to three years—and expects subsequent, additional costs of roughly 50 million pounds a year. Johnson & Johnson said that it could face as many as 50,000 additional tests of its products annually, while AstraZeneca has flagged potential duties as high as 6.5 percent on exports of products. —James Paton
Media Giants Consider Life Outside Britain
International broadcasters like Discovery Communications Inc. and Walt Disney Co. are still weighing whether to move staff and operations into the EU. Like global banks, they use U.K. licenses to transmit channels into continental Europe, an arrangement that PM May has said will end after Brexit. The promise of a transition deal has calmed some fears, but contingency plans remain active. Ireland, the Netherlands and Estonia are among the EU countries looking to lure their business.
Telecoms firms Vodafone and BT are also keen to see the U.K. and the EU sign a data-sharing deal that will allow the free flow of customer information, while moving staff across the continent is another concern. —Joe Mayes
Brexit Is Pushing Up the Price of Eating Out
For restaurants, Brexit may contribute to rising costs in three ways. First, any new tariffs would boost import prices. Second, a weakening pound makes food and wine imports more expensive. Third, restaurants rely heavily on EU workers, and labor costs could increase without them.
“Brexit has already had a terrible effect on the morale of our European staff,” says Jeremy King, whose restaurants include the Wolseley. “Brexiteers will point to there still being a high percentage of European staff still in the country but the pervading sentiment amongst them is that it is for the short-term. For us to grow and improve this industry we need a more permanent workforce.”
King says 65 percent to 75 percent of his workforce is from the EU. The number of London restaurant closures in 2017 increased to 84 from 75 a year earlier, according to Harden’s dining guide, as higher food and labor costs combined with rising property prices and local taxes to squeeze profits. —Richard Vines
©2018 Bloomberg L.P.
With assistance from Editorial Board