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What is the impact of Brexit on businesses?

Brexit is far from being resolved but it is already having a big impact on UK businesses. We have a look at four ways Brexit is impacting UK businesses and explain how to trade them.

UK businesses are far from understanding how Brexit will impact their operations, but it is already wielding its influence. It has offered both risk and reward to the financial markets, with investors fighting to mitigate the threat Brexit poses to their portfolios while traders pounce on the new opportunities that Brexit-induced volatility has to offer.

We have a look at four ways Brexit has impacted UK businesses and financial markets and explain how to analyse your portfolio and take advantage of trading ideas inspired by the UK’s departure from the EU.

  1. Business investment
  2. Supply chains and cross-border trade
  3. Labour and employment
  4. EU funding to British business

Uncertainty over future UK trade sees business investment stall

Businesses have not had any certainty over the terms on which the UK plans to leave the EU, let alone what the future trading relationship will be. Businesses have had little response to the key answers they need to plan effectively, such as what type of market access they will have, what tariffs they may be subject to or how it will impact their workforce or funding? The UK government has issued guidance and then withdrawn it, postponed the Brexit date and the stalemate in parliament is at its worse.

The deal struck by outgoing prime minister Theresa May looks very unlikely to be revived after being rejected four times, but the EU also looks steadfast in its position that it won’t be returning to the bargaining table and that May’s deal is the only deal. Then there is the fact that May is sitting on her hands and waiting for someone to take over the poisoned chalice. All the current Conservative leader contenders have outlined some ‘unique’ approach as to how to handle Brexit if they are awarded the top job – will the new leader and PM go for Hard, Soft or No Brexit? Will the EU be willing to renegotiate with the new leader or stand behind the deal it took over two years to strike, even if they know the UK parliament won’t ratify it?

If anything, the situation is becoming more uncertain and volatile for businesses and when companies don’t know what the next few months have in store – let alone the next five to ten years – they understandably batten down the hatches.

It is often forgotten that the UK and the EU are yet to agree on a withdrawal agreement, let alone a trade deal. The pair have committed to a ‘political declaration’ in November 2018 but it is a vague and non-legally binding commitment.

Read about how the UK economy nearly halts as Brexit weakens demand

Plus, UK businesses are not just concerned over access to Europe after Brexit but trade with everyone else. As the country is unable to ink its own trade deals whilst a member of the bloc, the UK’s worldwide trade has been dictated by the EU for over four decades. That means the UK not only has the massive task of striking a deal with the EU but replacing the 35-plus trade deals the EU has struck with outside nations that the UK currently trades under. This includes the swathe of deals still on the table with some of the largest economies in the world, such as the US, Canada, Japan, China and India.

Current trade deals being negotiated with the EU

When negotiation directives were decided Type/details of deal State of play as of May 2019
US 2019 To eliminate tariffs on industrial goods, conform standards Next steps are yet to be determined
Canada 2009 Comprehensive Economic & Trade Agreement (CETA) Provisionally entered into force in 2017, awaiting ratification from individual states
Japan 2012 Economic Partnership Agreement (EPA) on trade and standards Came into force in 2019 but negotiations on Investment Protection Agreement (IPA) continue
China Investment Agreement to replace existing bilateral agreements between China and EU member states Currently in the 21st round of talks
ASEAN 2007 Bilateral Free Trade Agreement (FTA) with 7 nations* Group and individual meetings continue
India 2007 FTA Talks ongoing but no formal negotiations since hitting standstill in 2013
Australia 2017 Trade agreement Currently in fourth round of talks
New Zealand 2017 Trade agreement Currently in fourth round of talks
MERCOSUR 1999 Trade agreement Negotiations resumed in 2016 and further meetings booked in 2019
Mexico 2016 Modernisation of EU-Mexico Global Agreement signed in 2016 Legal text resolved, awaiting action from Mexico
Chile 2017 Trade agreement Currently in the fifth round of talks
Turkey 2016 Trade agreement Currently at a standstill until Turkey meets standards to join Customs Union
Bosnia & Herezegovina 2008 Stabilisation & Association Agreement (SAA) Enforced in 2015 but awaiting Bosnia to negotiate membership to WTO
Serbia 2008 SAA Enforced in 2015 but awaiting Serbia to negotiate membership to WTO
Morocco 2011 Association Agreement, agricultural trade Enforced in 2012 but talks on Comprehensive Free Trade Area on hold since 2014
Tunisia 2011 Comprehensive Free Trade Area Association Agreement enforced, currently in fifth round of talks
ASEAN Breakdown When negotiation directives were decided Type/details of deal State of play as of May 2019
Singapore 2010 FTA and IPA Draft deals signed, final formalities need completing on both sides
Malaysia 2010 Trade and investment negotiations Paused in 2016, awaiting response from new Malaysian government elected in May 2018
Vietnam 2012 FTA and IPA Draft deals presented, under consideration by EU Council
Thailand 2013 FTA Draft deals presented, under consideration by EU Council
Indonesia 2016 FTA Talks indefinitely suspended after military takeover in 2014, awaiting elected government
Philippines 2016 Trade and investment negotiations No date set for future negotiations
Myanmar 2014 Trade and investment negotiations No date set for future negotiations

(Source: European Commission)

In the absence of alternative arrangements being put in place, the UK will lose access to existing and new EU trade deals and fall back on to World Trade Organisation (WTO) rules. With this comes tariffs, both on UK exports and imports.

The UK cannot formally negotiate or ratify any new trade deals until it organises its exit for the EU, but it has started dialogue with numerous countries as a precursor. Some have argued that it will be a case of the UK simply rolling-over the deals, copying-and-pasting the terms of the existing deal non-EU countries have with the EU, and scribbling out the EU to replace it with the UK.

However, that is extremely naïve. To assume countries will give the UK – with a population of around 70 million people – the same deals they give to the EU bloc – with over 500 million people – is ridiculous. It would be very surprising if any country doesn’t take the opportunity to obtain concessions under any new trade deal signed with the UK, especially when the rest of the world knows the UK is on the backfoot. The UK needs the rest of the world more than the rest of the world needs the UK. There is already evidence of this happening, with India reportedly pushing for freedom of movement as part of any future trade deal, while the US has looked at tapping UK markets that were largely off-limits beforehand, like agriculture and healthcare.

The CETA between the EU and Canada that provisionally came into force in 2017 was eight years in the making. Talks with China, mostly confined to investment protection rather than trade, have dragged on since 2013. Even if the UK strikes trade deals with other countries it will not be anytime soon and, whilst it is true it will have more freedom in future negotiations with the rest of the world post-Brexit, the country will also have considerably less bargaining power on its own than as an EU member.

Right now, there is little reason to feel confident about the UK’s future trade deals. Major economies have kept their options open and the UK has initiated talks with countries that accounted for just 8.6% of all the UK’s international trade in the year to the end of September 2018. For perspective, around 11% of the UK’s current trade is conducted through trade deals that the EU has struck with non-EU members.

UK trade deals post-Brexit: who is the country talking to?

Type of Agreement % of total UK trade
Albania Association Agreement 0%
Algeria Association Agreement 0.19%
Bosnia & Herezegovina Association Agreement 0.01%
Cameroon Economic Partnership Agreement 0.01%
Canada Free Trade Agreement 1.43%
Central America** Association Agreement 0.08%
Ivory Coast Economic Partnership Agreement 0.03%
Egypt Association Agreement 0.24%
Georgia Association Agreement 0.01%
Ghana Economic Partnership Agreement 0.10%
Japan Free Trade Agreement/Mutual Recognition Agreement 2.2%*
Jordan Association Agreement 0.03%
Kenya Economic Partnership Agreement 0.11%
Kosovo Association Agreement 0%
Lebanon Association Agreement 0.05%
Mexico Free Trade Agreement 0.34%
Moldova Association Agreement 0.04%
Montenegro Stabilisation & Association Agreement 0.01%
Morocco Association Agreement 0.18%
North Macedonia Association Agreement 0.15%
Serbia Association Agreement 0.04%
Southern Africa Customs Union*** Economic Partnership Agreement 0.75%
South Korea Free Trade Agreement 1.16%
Tunisia Association Agreement 0.03%
Ukraine Association Agreement 0.09%
Andorra and San Marino Customs Union 0.03%
Turkey Customs Union 1.39%

*Prior to EU-Japan trade deal coming into force, based on WTO terms

** Panama, Guatemala, Costa Rica, El Salvador, Honduras, Nicaragua

*** Botswana, Eswatini (Swaziland), Lesotho, Mozambique, Namibia, South Africa

(Source: UK Department for International Trade)

While some argue that the UK is more than capable of thriving under WTO rules, this doesn’t stack up. Trading between most major countries or blocs are conducted through bilateral trade agreements. In fact, none of the EU’s top 20 trading partners trade purely on WTO terms.

More about how Donald Trump vows to give the UK a 'phenomenal' post-Brexit trade deal

The UK must strike a careful balance when it comes to future trade deals: ensuring it upholds standards while promoting economic prosperity. But this will be difficult. For example, the UK wants a trade deal with the EU and argues this should be easy because the pair are already aligned. But how does the UK therefore envisage striking a deal with countries like Turkey that have failed to convince the EU that it meets the bloc’s standards?

Stalling business investment: what does it mean for investors and traders?

Look for companies that have the confidence to invest. These are likely to be companies that either have extremely strong businesses or are shielded from the major impacts of Brexit, while those delaying investment may struggle to generate growth in the coming years.

However, it is also worth looking at what stocks are doing with the money if they’re not investing – most companies struggle to hoard cash without being pressured to return it to shareholders.

Disruption to supply chains and cross-border trade

British and European supply chains have become heavily intertwined. Many UK businesses import materials or components from the EU to create products and then export them back to the EU as a finished product. This is evident when you look at the UK’s trade in goods with the EU:

Top UK goods exported to EU Value (£, bn) % of total Top EU goods exported to UK Value (£, bn) % of total
Road vehicles 18.3 11.20% Road vehicles 46.8 18.10%
Petroleum/petroleum products 15 9.20% Medical and pharma products 20.3 7.90%
Medical and pharma products 12.8 7.80% Electrical machinery/appliances 11.5 4.40%
Other transport equipment 8.8 5.40% Telecoms and sound recording equip 9.9 3.80%
Electrical machinery/appliances 6.4 3.90% General industrial machinery 9.8 3.80%
General industrial machinery 6.4 3.90% Power generation machinery 7.8 3%
Power generation machinery 6.2 3.80% Office machines/adp machines 7.4 2.90%
Apparel and clothing accessories 5.3 3.20% Vegetables and fruit 6.9 2.70%
Organic chemicals 4.6 2.80% Petroleum/petroleum products 6.8 2.60%

(Source: ONS, 2018)

The automotive, pharmaceutical, aerospace and chemical industries are particularly reliant on free-flowing trade between the UK and the EU because they import from and export to the EU a lot. Many companies have already had to take severe action as the threat of new barriers has emerged: several carmakers have announced plans to downsize or shut UK car plants while chemical firms and others have been among the first to move regulatory approvals from the UK to the EU. This is because the UK is being regarded as a less valuable part of the supply chain post-Brexit.

Brexit shutdown chaos causes UK car production to stutter

However, the UK is not built on goods but on services, accounting for over three-quarters of the economy and around 80% of the country’s total exports. This has made talks over future trade more complicated as most of the EU’s trade deals are focused on the movement of goods and people. For example, the EU’s new deal with Canada omits the likes of financial services and air transport (both of which are vital for the UK economy).

How will Brexit impact UK financial services?

Top UK services exported to EU Value (£, bn) % of total Top EU services exported to UK Value (£, bn) % of total
Professional and technical* 31 28.20% Travel 35 42.80%
Financial 25.9 23.60% Professional and technical* 15.4 18.90%
Travel 19.1 17.40% Transportation 11.6 14.10%
Telecoms and IT 9.1 8.30% Telecoms and IT 6.4 7.80%
Transportation 7.2 6.50% Financial 5.2 6.40%
Insurance and pensions 6.9 6.30% Intellectual property 3.1 3.80%
Intellectual property 6 5.40% Government 1.8 2.20%
Construction 1.1 1% Construction 1.2 1.40%
Personal, cultural and recreational 1 0.90% Insurance and pensions 1 1.20%
Government 0.5 0.50% Personal, cultural and recreational 0.3 0.40%

*Includes legal, accounting, advertising, research and development (R&D), architectural and engineering services

(Source: ONS, 2018)

According to the Institute for Government, there are four options for the UK to secure a deal on services post-Brexit:

  1. Membership of the European Economic Area (EEA): This would allow UK services companies to continue selling into Europe and benefit from the likes of passporting, but the UK would also have to accept the EU’s other freedoms including the free movement of people, which complicates the immigration debate.
  2. Free Trade Agreement: An FTA would be the best way to strike a bespoke deal that takes the UK’s service industry into account. If pursued, it would likely be the biggest services deal the EU would have ever negotiated. This means securing a favourable FTA on services will be even harder for the UK.
  3. Customs Union: The EU has never allowed a country to include trade in services by joining the customs union, so this would offer no assistance for UK services.
  4. WTO: The Institute for Government has described the WTO’s rules on services trade as “very limited”. It does not cover the likes of passporting. The institute said “many countries consider the WTO commitments as insufficient in addressing barriers to trade in services. Efforts are being made to build on this basic framework to lift more barriers on trade in services – but these negotiations are ongoing and obstacles to the successful completion of the agreement remain.”

UK service providers have issued a strong reaction to the Brexit uncertainty, with many having moved staff and offices to European bases. For example, several banks and financial services firms have set up new EU subsidiaries and shifted operations from London to either Dublin, Frankfurt or Paris.

Supply chain disruption and what it means for investors and traders

Look at where companies source their supplies and sell their goods or services. Any company reliant on importing or exporting – whether to the EU or elsewhere (as this will still currently be covered by trade deals signed by the EU) – will feel the impact post-Brexit. Any disruption is likely to hit higher value sectors the most, like automotive and aerospace. You should also consider how important the UK is in any supply chain and whether an industry could live without the country post-Brexit. If part of a supply chain has been established in the UK because of the barrier-free access it enjoys to the EU then companies can quite happily shift operations to the EU after Brexit to avoid incurring any new barriers to trade. However, if UK businesses are supplying something vital that the industry can’t get elsewhere then this may make it more resilient. Companies that sell British goods made from British produce will be shielded from the issues surrounding cross-border trade.

Is Brexit to blame for the automotive industry's woes?

Labour, employment and a shifting workforce

When the UK held the Brexit referendum in the second quarter (Q2) of 2016 there was about the same amount of people entering the country from non-EU countries as there was from the EU. Immigration is still a hot topic, mainly because no-one quite yet knows how to delicately balance the need for migrant workers and the desire to control the border, but emotions of the matter have subsided from their peaks during the referendum campaign.

Still, the result has already had a huge impact, with EU net migration falling from just under 200,000 in the year running up to the referendum to a low of nearly 50,000 in the year to the end of the third quarter of 2018. However, that reduction has been partly offset by higher net migration from non-EU countries, which has reached new highs following the vote:

EU citizens work in a variety of UK sectors although the majority – 53% - work across just five industries: automotive, manufacturing, health and social care, construction and hospitality.

What UK businesses rely the most on EU workers?

EU citizens (000s) % of all EU citizens working in UK
Wholesale, retail, repair of vehicles 316 13.70%
Manufacturing 275 11.90%
Health and social work 235 10.20%
Accommodation and food service 221 9.60%
Construction 181 7.80%
Transport and storage 178 7.70%
Education 172 7.50%
Professional, scientific and technical 166 7.20%
Admin and support services 157 6.80%
IT and communications 83 3.60%
Public admin and defence 82 3.60%
Arts, entertainment and recreation 36 1.60%
Agriculture, forestry and fishing 23 1.00%
Real estate 17 0.70%
Water supply, sewerage and waste 10 0.40%
Mining and quarrying 6 0.30%
Electricity, gas and air conditioning 5 0.20%

(Source: ONS)

However, while those sectors employ the most EU citizens in absolute terms it is better to evaluate the size of a company or industry’s EU workforce relative to its UK workforce. The two sectors most reliant on EU workers is hospitality – such as restaurants and hotels – and transport and storage, with both sourcing at least one-tenth of their workforce from the EU.

The UK’s EU workforce and what it means for investors and traders

There are some sectors that rely on EU workers for low-skilled work, such as fruit-picking, hospitality or retail, and some that rely on them for high-skilled work, such as in science or health. Both will have to make big adjustments if the UK does stem the flow of people coming from Europe. If the amount of people coming from the EU continues to fall or existing EU workers decide to return home, then companies will have to find replacements. Some argue it will push up wages to entice British workers to take jobs they have refused so far. Others have argued the UK can simply source foreign workers from outside of the EU and, whilst this this would still rely on migrant workers it could be necessary for high-skilled industries because training people in the UK can take years.

Analyse how reliant a company is on EU workers and question why it is dependent on them: is it because Brits won’t do the job or because they lack the skills? One problem is easier to solve than the other.

Will the UK plug the gap in EU funding after Brexit?

The UK is a net contributor to the EU budget, meaning it pays more in than it gets out. The two most significant EU funding channels for the UK are the European Structural and Investment (ESI) funds and the European Agricultural Guarantee Fund which, for the current budget period covering 2014-2020, allocated €17.2 billion and €22.5 billion, respectively, to the country. A lot of the ESI is directed to improving social conditions and underdeveloped regions. For example, the single-largest project being part-funded (all projects must be co-financed with a mixture of public and private funds) by ESI funds in the current budget aims to support the reintegration of prisoners back into the work force. In the case of the Agricultural fund, the aim is to level out competition across the bloc and UK farmers are highly dependent on the EU, with the fund accounting for 50% to 60% of their income.

There are two other primary mechanisms that UK businesses benefit from the EU. The first is through direct funding, which funds the likes of research projects through programmes such as Horizon 2020 and Erasmus+. The UK is one of the biggest receivers of EU funding for R&D, with the UK receiving 14% of the programme’s total budget and British universities accounting for the top four recipients across the entire bloc. Overseas financing, from both inside and outside the EU, funds around 16% of all UK R&D.

UK R&D funding and spending breakdown

Sector funding R&D in UK Value (£, bn) % of total Sector conducting R&D in the UK Value (£, bn) % of total spending of top 10
Government 3.6 10.80% Pharma 4.1 23%
Research councils 2.9 8.80% Automotive 3.4 19%
Higher education funding councils 2.2 6.70% Computer programming and IT 2.5 14%
Higher education funding councils 0.4 1.40% Aerospace 1.9 11%
Business enterprise 17.2 51.60% Misc/technical testing and analysis 1.3 7%
Private non-profit 1.7 5% R&D services 1 6%
Overseas (including EU) 5.2 15.60% Chemicals and chemical products 1 6%
Machinery and equipment 0.9 5%
Consumer electronics and comms equipment 0.8 5%
Telecoms 0.8 5%

(Source: ONS 2018, based on 2016 figures. Includes all R&D spending and not confined to that only funded by the EU)

The second is through the European Investment Bank (EIB), which borrows money on capital markets and lends it on favourable terms to projects that support EU objectives (these funds are in addition to/outside the main EU budget). The EIB committed an average of €5.4 billion to UK projects each year between 2011 and 2017, with projects supporting infrastructure, growth and employment among the top recipients.

What happens to the UK’s EU funding post-Brexit?

The UK government has said all EU funding is guaranteed until the end of 2020 whatever happens on the Brexit front, but after the UK leaves the bulk of EU funding will cease altogether. Brexiteers argue, as a net contributor, that the country is more than capable of plugging the gap on its own. The 2017 Conservative manifesto outlined plans to create a ‘UK Shared Prosperity Fund’ to replace the EU funding mechanisms and made a pledge to maintain payments for farmers until 2022.

This is one of the areas where the UK is accused of cherry-picking because it wants to participate in some EU projects and not others. The UK is particularly keen to remain part of Horizon 2020, the Galileo space programme and nuclear initiatives. The UK will also remain a shareholder of the EIB and all existing loans will be unaffected by Brexit.

Ultimately, the UK will still be able to tap EU funds post-Brexit, but it is likely to be considerably less than beforehand. Only 11% of the EU budget was spent in non-EU countries between 2011 and 2015, and the majority of that was in countries that have strong links to the bloc or ones hoping to join it.

Some have suggested the UK could look to plug any gaps in infrastructure funding through bonds or by launching a new UK investment bank.

What does the potential loss of EU funding mean for investors and traders?

EU funding reaches UK businesses through multiple, complex channels and some sectors are more reliant than others. Much of the ESI funding goes to government and social projects, so any loss could have a knock-on effect to companies providing services to the public sector. Meanwhile, infrastructure, construction and support services firms – many of which are already struggling financially – could also see a reduction in business if the UK fails to plug the gap post-Brexit.

This information has been prepared by IG, a trading name of IG Markets Ltd and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

Trading around Brexit

Find out how the UK’s exit from the EU continues to affect traders, and discover:

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