Brexit: The economic and business cost to Britain one year after the vote

Twelve months on from the shock result, what has been the impact on UK GDP, on finance, on manufacturers, on exporters?

These smiling millennials may be more economically conservative than their predecessors (Getty)

On the 23 June 2016, a relatively slim majority of the British electorate – defying the predictions of pollsters, pundits and the vast majority of politicians – voted to leave the European Union.

As the shock referendum outcome emerged, the pound instantly started wilting. When the stock markets opened the next morning, dealers’ screens were a sea of red as traders hit the sell button.

Politics was in chaos. David Cameron announced he was resigning. The Chancellor, George Osborne, was nowhere to be seen.

Panic was in the air and the Bank of England was forced to step in to stabilise the situation with promises of copious liquidity for the banking system.

The panic abated as the political situation stabilised.

But businesses soon began to warn of potentially disastrous consequences for the economy if leaving the EU resulted in a plethora of new tariffs, customs disruption and regulatory chaos. And they haven’t stopped raising the alarm since.

This Monday, the divorce talks between the UK and the EU officially and finally began.

As things stand, we will leave the bloc on Friday 29 March 2019.

So, one year on from the fateful Brexit vote, what has the impact actually been, so far, on the economy and business?

The broader economy

On the night of the decision itself, the pound suffered its biggest one-day fall against the dollar on record as currency traders bet that leaving the EU would impose a long-term and permanent economic cost on Britain, hitting its lowest in 31 years at around $1.2117.

The pound climbed back above $1.3 after Theresa May called her snap election and traders bet that she would be returned with a commanding majority, but has now given back all those gains.

Today, the currency remains some 15 per cent below its level on 23 June last year at $1.2666.

While the depreciation is a benefit for UK exporters, it also means the cost of imports has soared, which is the reason domestic inflation is now rising faster than workers’ pay, imposing a fresh squeeze on living standards.

Inflation hit 2.9 per cent in May, its highest since June 2013 and is expected to peak above 3 per cent.

Business investment has also suffered since the Brexit referendum, as firms have been affected by a cloud of uncertainty that has descended over the UK’s future trade arrangements with the rest of the EU – and the associated threat of tariffs and customs barriers.

Investment fell by 0.9 per cent in the final quarter of last year, contributing to the first calendar year decline since 2009.

According to the Bank of England, the level of business investment is expected to be around 25 per cent lower by 2019 relative to its pre-referendum forecasts, damaging our future productivity growth.

The British consumer proved surprisingly resilient after the referendum – a resilience that was responsible for the fact that GDP growth carried on robustly and the UK avoided a recession.

The economy actually grew by 0.7 per cent in the final quarter of 2017, faster than just about anyone had expected.

Yet, since the turn of the year, there have been distinct signs of shoppers running out of steam as inflation bites. Retail sales, a crucial component of consumption, fell by 1.4 per cent in the first quarter of 2017, the biggest quarterly fall since 2010. This was a major contributor to the crash in GDP growth in the first quarter to just 0.2 per cent.

Economists expect a slight pick-up in the second quarter growth rate, but most are downbeat about the UK’s near-term prospects, especially in light of the inconclusive general election result.

A survey by the Institute of Directors pointed to a major slump in confidence among its members immediately after the vote, which bodes badly for investment.

The mounting fears of businesses of a Brexit “cliff edge” have prompted the Chancellor, Philip Hammond, to start lobbying hard within Government for the UK to push for a transition deal in 2019 to allow commerce to continue in precisely the same way as it did before – at least until a proper UK-EU trade and customs deal can be concluded.

Banking and financial services

In January, the chief executive of the London Stock Exchange warned that Brexit could cost the City of London up to 230,000 jobs if the Government fails to provide a clear plan for after the split.

At the World Economic Forum in Davos this January, UBS chairman Axel Weber said that about 1,000 of the Swiss bank’s 5,000 employees in London could be affected by Brexit, and HSBC chief executive Stuart Gulliver said his bank will relocate staff responsible for generating around a fifth of its UK-based trading revenue to Paris.

Goldman Sachs’ Europe chief executive, Richard Gnodde, said in March that the US bank would relocate hundreds of staff out of London even before any Brexit deal is struck, as part of its contingency plans. The company currently employs around 6,000 people in London.

Others have already taken more drastic steps.

Money transfer company Transferwise, one of the biggest fintech firms in Europe, said in early April that it will move its European headquarters from London to mainland Europe by March 2019 in order to keep access to the single market after Brexit.

Other banks and insurance companies have said that they will be opening European subsidiaries, but while such a move will likely incur additional costs, it won’t necessarily mean job moves in every case.

Just this weak, the Japanese investment bank Daiwa confirmed that its new EU base will be in Frankfurt, and that it will be shifting some staff out of its London office.

The European Commission this month pushed ahead with plans to assert control over the clearing of euro-denominated derivatives, which could ultimately force tens of thousands of jobs out of London and break off a key part of the City’s infrastructure.

Auto industry

The number of cars built in the UK hit a 17-year high last year and more cars are being exported from Britain than ever before, but a failure to establish proper trade deals after Brexit could damage the industry “beyond repair”, the Society of Motor Manufacturers and Traders (SMMT) warned back in January.

Generally, because of the car industry’s global exposure, its integrated EU supply chains and its dependence on workers from abroad, it is considered one of the sectors most vulnerable to a hard Brexit, defined as exit from the single market and the customs union.

Britain moving to a World Trade Organisation tariffs regime after Brexit could lead to the introduction of a 10 per cent tariff on finished vehicles and a 4.5 per cent levy on component parts for cars.

In March, a research study done by PA Consulting showed that if manufacturers pass these costs directly on to customers – and taking all the stages of production into account – the price tag for a new vehicle could soar by as much as £2,372 per car.

That was echoed by Mike Hawes, the head of the SMMT, who predicted this week that the cost of imported cars could rise by £1,500 if tariffs were introduced.

And some car production could ultimately depart too.

Nissan pressed ahead with a major planned UK investment at its Sunderland plant last October, but has also said it would re-evaluate its decision in light of the final Brexit outcome.

Toyota pledged in March to go ahead with a £240m investment in its Derbyshire factory. But the Japanese firm also warned that “continued tariff-and-barrier free market access between the UK and Europe that is predictable and uncomplicated will be vital for future success”.

BMW hinted in March that it may move production of the Mini from Oxford to continental Europe due to Brexit.

Construction and manufacturing

Like the car industry, the global nature of the construction and manufacturing sector stands to lose a lot, especially if Brexit restricts the free movement of labour.

The Royal Institution of Chartered Surveyors in a report published in March argued that almost 200,000 construction jobs could be slashed if Britain loses access to the European single market, jeopardising billions of pounds worth of infrastructure projects and dealing a sharp blow to major UK cities’ global competitiveness.

In February, a study from consultancy firm KPMG showed that one in three manufacturing firms plan to shift some operations out of the UK as a result of Brexit.

The British Chambers of Commerce and the Confederation of British Industry have also issued stark warnings about the possible impact of Brexit on certain industries.

And the Brexit vote already seems to be impacting on the supply of EU workers to Britain.

The Office for National Statistics estimated in May that long-term net migration was 248,000 in 2016, down a “statistically significant” 84,000 from 2015.

Around 117,000 EU citizens left the UK in 2016, an increase of 31,000 on 2015 and the highest recorded estimate since 2009.

Food and drink

More than half of the food we eat in the UK comes from abroad, meaning that the post-Brexit fall in the pound has been squeezing the food and drink industry since the pound started sliding in June.

Suppliers have seen their costs jump and a lot of that is being passed on to consumers as supermarkets aim to keep prices as low as possible to protect profits.

Last year, that tension over price rises resulted in a public spat between Tesco and Unilever.

Britain’s biggest supermarket refused to accept price rises on hundreds of Unilever products, causing Marmite to become a symbol of the industry battle over price increases.

Mondelez’s Cadbury products, Nestlé’s Nescafé, Premier Foods, the maker of Mr Kipling and Bisto gravy, have since all hiked prices or said they were considering doing so.

Other companies have been quietly shrinking the size of their products, a process that has become known as “shrinkflation”, whereby prices remain the same as portion sizes get smaller.

Experts have also said that Brexit could have an impact on jobs within the food and retail industry.

Ufi Ibrahim, the head of the British Hospitality Association warned in March that restaurants in the UK will need a decade to replace their EU staff with British employees after Brexit.

The director of human resources at Pret a Manger told a parliamentary committee in March that only one in 50 job applications she receives is from British nationals meaning that the business will struggle to attract staff if immigration controls are implemented.

Farmers warned this week that the price of British strawberries could jump by as much as 50 per cent if the industry loses its Romanian and Bulgarian seasonal workers.