Many critics of the UK’s decision to leave the EU say the only reason people are not feeling any pain is because Brexit has not really started yet. Pending the invocation of Article 50, and with the UK economy posting stronger-than-expected GDP growth in Q3, an alarming underestimation of the negative long-term consequences of Brexit seems to have gradually superseded the bout of initial pessimism seen immediately after June’s vote.
Some metrics of economic performance do indeed suggest that the fundamentals of the economy are solid: for example, domestic output expanded by 0.5% quarter on quarter in Q3. Although this was a little slower than Q2’s 0.7% growth pace, it was still faster than the average forecast of 0.3%, defying experts’ prediction of an economic recession following a Brexit vote.
Furthermore, retail trade growth accelerated over the quarter, while inflation is also gradually picking up on account of a cheaper pound (albeit remaining well below the Bank of England’s medium-term target of 2%). September’s forward-looking indicators also bode well for future economic activity, with Markit’s Purchasing Managers’ Index (PMI) for the manufacturing sector rising to its highest level since mid-2014.
Dun & Bradstreet Maintains a Deteriorating Rating Outlook for the UK
Notwithstanding the current economic bonanza, Dun & Bradstreet predicts that Brexit’s medium- to long-term economic impact on the UK will be significant and negative. With the UK heading for a ‘hard’ Brexit, we have downgraded the country’s risk rating from DB2c to DB2d (still just within the ‘low risk’ category). We are also maintaining our ‘deteriorating’ rating outlook.
Prime Minister Theresa May’s government intends to prioritise immigration control and the supremacy of British law over EU legislation, making it increasingly unlikely that the UK will retain access to the EU’s common market once Brexit is eventually completed. This will increase the economic cost of Britain’s departure from the EU, with the UK being hit harder than the EU.
The possible loss of the passporting rights that currently allow UK-based banks to operate across the EU is a major source of concern. Anthony Browne, chief executive of the British Bankers’ Association, recently claimed that Britain’s biggest financial institutions are already planning to leave the UK in early 2017, while smaller banks are preparing to relocate before the end of this year.
Goldman Sachs is allegedly making plans to transfer some 2,000 employees to a rival European city, and JPMorgan warned that as many as 4,000 jobs could be shifted out of the UK, according to its chief executive, Jamie Dimon. Nomura and Morgan Stanley are also among the companies that could move their operations out of the UK, although the latter recently denied a report that it had already decided to relocate 2,000 workers to either Dublin or Frankfurt.
Overall, Brexit could take a heavy toll on the UK’s financial sector: up to 70,000 finance industry jobs could be lost if Britain leaves the EU, according to the industry body TheCityUK.
While the domestic labour market and forward-looking indicators so far remain unimpressed by the looming hard Brexit, the pound is under pressure. In the 12 months ending October 20 the pound lost 18% against the euro, 20% against the dollar, and a stark 32% against the yen.
EasyJet and Ryanair, together with several other UK-listed companies, are being affected by a weaker pound. EasyJet is expecting profits to fall by at least a mid-single-digit percentage in the second half of the year compared with the second half of 2015. Ryanair has released its first profit warning since autumn 2013, lowering its growth forecast for the year by five points to 7% in October. Both companies blame their troubles on the fall in the value of the pound since the Brexit vote.
Dun & Bradstreet doesn’t expect the pound to recover until the UK’s future relations with the EU are negotiated, something unlikely to be completed until the early 2020s. Until then, the battle of sentiment between optimism and pessimism looks set to continue.