Global news over the past months has been entirely dominated by the trade dispute between the United States and seemingly every other country, most notably China. As of today the two largest economies in the world are putting tariffs on each other. While this is quite important to follow, we felt that another important economic issue has been neglected lately – Brexit. This week we want to look at how Brexit negotiations are going and what’s in store for the British economy.
Now that Brexit is looming closer, major companies from the United Kingdom are stepping forward with specific figures of estimated damage to the economy if Brexit does not go well (i.e. if Britain is unable to agree to a trade agreement with the European Union). The leading car manufacturer in the United Kingdom, Jaguar Land Rover, estimates a loss in profits by 1.2 billion pounds in that scenario, and similar warnings are coming from the British branch of BMW and Airbus. The car industry has been among the most vocal regarding Brexit, because nearly 50% of all vehicles made there are exported to the European Union. If the UK fails to secure a customs-free agreement with the EU businesses are afraid that they would have to close down some of their factories and reduce jobs. Foreign investment is also in jeopardy, and Japan has stated it is ready to relocate its European manufacturing elsewhere on the continent in order to avoid fees.
The banking sector is another huge source of uncertainty. London has long been serving as the top financial center of Europe and is home to quite a few international financial businesses. Many of them are already preparing to abandon ship and relocate to Frankfurt, for example. Still, the European Banking Authority is advising financial companies in the United Kingdom to have a back-up plan in case no agreement is reached between the EU and the UK. The Bank of England has been reassuring, stating that British banks can handle the stress of the transition, but even the BoE is looking towards PM Theresa May to see what is going to happen.
It is likely that the reason why more companies have not been able to estimate the possible damage of Brexit is due to a lack of clarity from the government. It is yet unknown precisely what Theresa May’s cabinet will bargain for and what they are willing to give to the European Union in exchange. Without a proposed plan of action, companies in the United Kingdom have no clue what to prepare for.
May’s cabinet, which has been quite divided over policy making, is meeting today to discuss their Brexit strategy. Although the British pound has been doing better in the past weeks due to positive economic statistics, any additional uncertainty from the British government could harm the sterling.
