Brexit: the business view

24 March 2016

80 per cent of CBI members want to stay in the EU and with analysis from PwC, it’s easy to see why: leaving the EU would cause a serious shock to the UK economy, potentially costing £100bn and 950,000 jobs

There are many factors that will decide the outcome of the EU referendum on 23 June. But businesses are uniquely placed to discuss the likely impact on trade, investment, jobs and growth. And through both analysis and anecdotes, it’s increasingly clear that many businesses have enjoyed the benefits of membership and are concerned about the uncertainty a vote to leave will bring.

 “BT earns around a fifth of its revenue outside the UK, providing broadband, network and IT services for international business and large organisations,” says Gavin Patterson, chief executive of BT. “We value the way the EU has helped to open up markets, it has been a genuine help when it comes to us providing services outside the UK.”

“We also value the way the EU brings the weight of 28 member states to world trade talks. We face regulatory battles beyond Europe, trying to get a level playing field as we compete with overseas incumbents.”

But it is not just large firms that enjoy the advantage. Coventry University and Cambridge-based TWI, for example, both credit EU research grants for their growth.

Meanwhile mid-sized telecoms business Comtek relies on free movement of people – who in turn help upskill its UK employees. Freight specialist Palletways describes the ease that comes from free movement of goods within the EU.

And rather than railing against EU-imposed regulation, in the food and drink sector, Chris Ormrod, managing director of the Ministry of Cake, has bigger concerns about taking them away: “There’s something like 700 ingredients we use across all of our cakes. All of those will have been approved by and agreed to EU standards. If we step outside the EU, we will find ourselves making products that perhaps aren’t quite to the latest standard, or even worse, we don’t have a say in how to make those standards.”

The economy at stake

Ormrod was one of a number of business leaders that shared their view at the CBI’s economic lecture at London Business School on 21 March. Hot on the heels of a CBI member survey that revealed 80 per cent of firms saw it in their best interest to remain in the EU, the lecture was based on research commissioned from PwC, highlighting the extent of what was at stake for both businesses and the economy.

It's not just the scale of the impact, this will be a longer term shock than we've experienced in recent times

Even using fairly optimistic assumptions – that the UK would swiftly agree a free trade agreement with the EU or, alternatively, operate under the terms of the World Trade Organisation (WTO) – the conclusion was that the UK could not recover the impact of Brexit on its GDP within the next 15 years.

“It’s not just the scale of the impact, this will be a longer term shock than we’ve experienced in recent times,” said Andrew Sentance, senior economic advisor to PwC and the report author.

A vote to leave could reduce investment by 16-26 per cent by 2020, the research found.

Even under the “best-case” FTA scenario, the impact of uncertainty would only fade away around 2025. But the overall negative effect of the WTO scenario would be greater.

“The initial uncertainty has a greater impact on GDP, causing a substantial decline whose effects are felt until 2030,” explained CBI director-general Carolyn Fairbairn. “The short-term impact is particularly harsh. The UK’s ability to pursue its own external trade policy would not make up for the negative effects of the return of trade barriers and a rise in non-tariff barriers. This could permanently reduce GDP by as much as 2 per cent in 2030.”

This could permanently reduce GDP by as much as 2 per cent in 2030

If the UK is unable to secure a free trade deal, GDP would be down 5 per cent, or £100bn, in 2020, which equates to a cost of £3,700 per household. By the same point, there would be 950,000 fewer jobs, with the unemployment rate rising from 5 per cent to 8 per cent.

Behind the shock

“An important question not asked often enough is what does leaving look like?” said CBI economics director Rain Newton-Smith. “Article 50 has never been triggered.”  

“We would be putting our fate in the hands of the 27 other EU nations,” said Fairbairn, referring to the imbalance of power away from the UK in any negotiations.

HSBC’s group chairman Douglas Flint highlighted the uncertainty that would create: “Every business in the case of a Brexit would have to stand back and look at its business from the point of view of contingency: what happens next? What happens to our supply chain? What happens to our customers or the employees we have?

“People would have to think very carefully about what the impact would be in a period where we’d have two years of negotiation before there’d be any clarity about what the terms of exit were going to be.”

And when UK branches of multinationals, such as Siemens, compete with their peers in other countries for investment, such uncertainty is likely to weigh on decisions.

“Will investment cease? No, of course not, but it will take some time for that stability to regain and for us to look to the UK as an attractive place to invest,” said Maria Ferraro, chief financial officer at Siemens.

“Sterling could be first to feel the effects of a vote to leave,” added Newton-Smith. “And our members say the volatility is hard to deal with.”

For Jarl Severn, managing director at medical device manufacturer Owen Mumford, a weaker pound would help exports outside the EU – but its effect on exports and imports to and from the EU would be “a bit of a seesaw and rollercoaster ride for all concerned”.

“The uncertainty that’s been created by even the question of a Brexit has been really bad for us in terms of exchange rates,” added Charlie Allen, MD at Bristol-based skateboard distributer Shiner.

The hit to trade

Tariff-free access to 500 million consumers in the EU effectively creates a home market eight times the size of the UK, so it’s no wonder 45 per cent of UK exports go to the EU. But forging a comprehensive deal for the UK to compensate for the lack of access to the single market could be 10 years in the making, argued Newton-Smith.

Looking further afield, she added that the UK is unlikely to have the capacity to negotiate the many deals that would be necessary at the same time, let alone secure better conditions.

We trade all around the world and the easiest business we do is within the EU

“When trading with America we have to pick up the import duty as the supplying factory. We are less profitable in that market,” said Dave Hall, CEO, of Northumberland-based manufacturer Renolit Cramlington. “In the EU it is far simpler – and in Turkey, which has a good trading relationship with the EU, it gives us an advantage over the competition from Korea and China.”

“We trade all around the world and the easiest business we do is within the EU,” added Wyke Farms MD Richard Clothier. “There are no tariffs, it’s the same legislation and we use the same labels.”

By comparison, despite the language advantage when the cheesemaker trades with the US and Australia the labels are “quite different” and there is different weight legislation to contend with. “They’re subtle changes that can add quite a lot of complication and cost,” said Clothier.

Of course, burdensome EU regulation is cited as one of the reasons to leave the EU – and certainly an area where continued reform and simplification is wanted. But in order to continue trading with the EU, as Norway does, the UK would be likely to keep 95 per cent of the most costly regulations, without influence over any legislative changes coming through.

“The overall impact of EU regulations can be overstated,” said Newton-Smith. “The UK has one of the most competitive regulatory environments in the world.”

“It is hard to see circumstances under which the UK could secure a better set of deals on trade and investment outside the EU. Leaving the EU would hit some of the UK’s top sectors hardest,” concluded Fairbairn.

“And current global uncertainty means that now could be one of the worst times to leave.”