With less than 100 days until the EU referendum, concerns about the impact on the UK economy, and retailers in particular, are running high.
But how likely is a Brexit and to what extent should retailers be fearful?
If opinion polls are anything to go by, the vote is poised to be very close – most show the ‘remain’ and ‘leave’ camps are roughly neck and neck. That said, given the experience from last year’s general election, we should take the polls with a generous helping of salt.
In any case, most polls indicate that around 20% of voters are undecided. That is a big number, and a lot could swing the vote over the next few months.
Another option is to look at bookmakers’ betting odds. These are perhaps a better indication of how people will vote as they represent people putting their money where their mouth is.
These show a significant lead for the ‘remain’ camp. That said, I doubt the vote will be quite as clear cut as bookies’ odds suggest, particularly because of the amount of undecided voters.
But let’s suppose for a moment that the UK does vote to leave. Clearly one concern for retailers is that consumer spending weakens significantly and sharply.
However, I doubt this would be the case. For starters, in the event of a Brexit, the majority of the population would have got what they voted for.
“Recent polls show that people generally do not think that a Brexit would make any difference to their personal situation”
Paul Hollingsworth, Capital Economics
In any case, other factors tend to drive spending, such as whether an individual has a job, what is happening to wage growth, house prices and fuel costs.
Recent polls also show that people generally do not think that a Brexit would make any difference to their personal situation.
Of course, there could be an indirect impact on consumers if business confidence and investment falter in the event of a Brexit.
But remember that post-Brexit negotiations would take up to two years to conclude, and in the meantime all the existing arrangements would remain in place. So it would be largely business as usual.
The other major concern for retailers is that a Brexit would drive up costs. In particular, it might cause the pound to weaken sharply, pushing up the price of imported goods.
The pound has already fallen 7% since mid-November against the dollar, and 10% against the euro. And it seems likely that further falls would follow in the event of a Brexit, at least in the short term.
But a Brexit would also probably have an adverse impact on the European economy, which might mitigate the extent of any further falls against the euro.
Immigration and employment
Another issue is that a Brexit could be followed by a tightening in the UK’s migration policy.
Even just a transition to a more skills-based, rather than the current nationality-based system, might stem the flow of low-skilled workers from overseas.
This would diminish the supply of workers available to fill basic retail roles, in theory pushing up wages in the retail sector – at a time when retailers are already dealing with the introduction of the national living wage and pensions auto-enrolment.
However, most evidence suggests that migration has a surprisingly-small effect on domestic wages.
What’s more, workers from the European Economic Area (which includes a handful of countries outside the EU) actually account for a small fraction of retail employment, both in absolute terms and relative to some other sectors.
The upshot is that while retailers should be cautious about a slight short-term hit to demand in the event of a Brexit, there are plenty of reasons not to be overly fearful.
- Paul Hollingsworth, UK economist, Capital Economics