The untold Brexit story is the waste of resources

Brexit is bringing in its wake higher costs and capital losses and is bound to have a negative impact on the UK’s economic future.

“Brexit is a process, not an event,” contends Sir Ivan Rogers, the UK’s former representative to the EU.

That process could well create more potential cliff-edges, especially the growing possibility of a general election. The very real possibility of a hard-left Labour Party victory would likely discourage both local and foreign business and investment. The signs are already pointing in that direction even though the stock market is ignoring them. UK growth fell to 0.2 per cent in the fourth quarter of 2018 from 0.7 per cent in the previous three months. Year on year growth was a dismal 1.4 per cent in 2018. Inflation is 1.9 per cent, so the UK is already in the grip of stagflation.

THE FTSE 250 INDEX REPRESENTS MEDIUM SIZED UK COMPANIES RATHER THAN THE FTSE100 INDEX THAT COVERS MULTI-NATIONAL BUSINESSES. THE FTSE 250 IS THEREFORE MUCH MORE REPRESENTATIVE OF THE UK ECONOMY. THE INDEX HAS RALLIED BY 16 PER CENT BUT IS STILL WELL BELOW ITS 2018 HIGHS. IN THE LIGHT OF ECONOMIC TRENDS IS THIS A BEAR MARKET RALLY?

The costs to the State

Within several unpredictable outcomes, a “no deal” Brexit is highly unlikely. The UK Treasury has already set aside £1.5 billion in the year 2019 to 2020 to cope with customs borders and employ thousands of civil servants. Indeed the Institute of Government has already factored in State costs of £2 billion. Since “no deal” will probably not take place, the government has already thrown money down a hole.

Costs to Business

The Confederation of British Industry and British Chamber of Commerce estimate that UK companies have already spent billions of pounds to prepare for the possibility of “no deal”. This ranges from setting up operations abroad to stockpiling goods. Bloomberg’s Brexit tracking barometer lists 115 major companies that are spending “hundreds of millions” of pounds to cope with the possibility of no deal Brexit or a poor deal Brexit. Banks such as Barclays, Goldman Sachs, HSBC and JP Morgan and Lloyds of London and other insurance businesses AIG, Chubb and Admiral, have set up operations in EU cities. Panasonic, Sony and Shionogi are shifting their European headquarters from the UK. AstraZeneca and Novartis and Pfizer announced that they raised the stockpiles of their drugs. Rolls Royce, Bentley and Bosch are raising inventories for parts. Heineken, Imperial Brands, Unilever and Nestle have raised stocks to cope with potential disruptions. Reckitt Benckiser, the consumer goods group, which makes products like Nurofen and Durex condoms, is building about four weeks’ worth of extra stock. Burberry, the luxury fashion brand said a “no deal Brexit” would increase costs of materials by tens of millions of pounds and logistical delays would impact the delivery of items. Jaguar Land Rover, Britain’s largest carmaker plans to cut jobs. Honda has shut a factory and Nissan is also scaling back. Auto company decisions are partly because of the global slowdown, but Brexit is undoubtedly a major factor. Those companies that have stockpiled goods will eventually sell them, so a proportion of costs will be recovered. Regardless, time and resources have been wasted and are likely to impact the bottom line in the future.

Uncertainty the key factor

The major problem is business uncertainty which is also affecting businesses ranging from airlines to hotels and retailers on both sides of the Channel.

“After already facing two potential cliff-edges, on March 29 and April 12, small businesses are being asked to wait and see all over again,” said Mike Cherry. National Chairman of the Federation of Small Businesses. “Brexit extensions provide no comfort that there will be an end to the debating, dithering and delay.”

The most significant cost is sliding direct investment

Direct investment in job-creating factories, plant and equipment, has already underperformed since the great recession of 2008 and 2009. Poor economic policies since then have been a key reason. but a marked investment decline has been observed since the 2016 Brexit referendum.

In a speech Jonathan Haskel, External Member of the Bank of England Monetary Policy Committee said that “UK investment has been very weak in the last couple of years, especially during the last year”.

This has considerable economic significance as direct investment in factories, plant and equipment investment accounted for 17 per cent of the UK’s £2.1 trillion gross domestic product in 2018.

Since the recession, UK investment grew by annual average of 4.3 per cent but post referendum the growth rate has averaged negative 0.4 percent, Mr Haskel estimated. He suggested that Brexit caused “almost 70 per cent of the slowdown”.

Bottom line, continued Brexit uncertainty, notably trade and other negotiations, the weak pound and election worries will cost billions in lost local and foreign investment.

© Copyright Neil Behrmann. This editorial was first published in The Business Times, Singapore.
Neil Behrmann
is London correspondent of The Business Times. Jack of Diamonds his thriller on global diamond mining and smuggling, has recently been published. It is the sequel to the thriller, Trader Jack, The Story of Jack Miner. See reviews: https://www.amazon.co.uk/Neil-Behrmann/e/B005HA9E3M

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