Britain has sensationally voted to leave the EU. Here’s a piece Retail Week wrote in April examining the claims of what a vote to leave could mean for retailers.
What are the UK’s long-term economic growth prospects if the country leaves the EU?
The key Brexit issue is what impact the poll outcome to leave the EU would have on the economy generally.
There would undoubtedly be short-term economic pain as consumers scramble to understand a post-EU landscape and political jostling between Brussels and London begins.
“Economic and financial prospects have taken something of a nosedive – probably not helped by uncertainty around EU membership”
Paul Smith, senior economist, Markit
There has already been a dip in business investment decision-making as the June vote draws closer, which is reducing company spending and hiring, for instance – a trend likely to remain prevalent if voters back Brexit.
Paul Smith, senior economist at financial services company Markit, notes: “Economic and financial prospects have taken something of a nosedive – probably not helped by uncertainty around EU membership – and that’s led to those holding company purse-strings to adopt caution when committing funds.”
A report from think-tank Open Europe finds that the economic impact of Brexit in the long run is not as clear-cut, whatever the decision, as some economic and business commentators have suggested
But a report from think-tank Open Europe finds that the economic impact of Brexit in the long run is not as clear-cut, whatever the decision, as some economic and business commentators have suggested.
In a worst-case Brexit scenario, in which the UK fails to strike a trade deal with the rest of the EU and applies tariffs rather than pursues a free-trade agenda, Open Europe estimates that UK GDP would be 2.2% lower in 2030 than if the the country had remained inside the EU.
On the other hand, if the UK strikes a free-trade agreement with the EU and opens up almost fully to trade with the rest of the world – a so-called best-case scenario – the organisation estimates that GDP would be 1.6% greater in 2030 than if it had remained part of the EU.
The economic outcome ultimately depends on whether UK politicians are able to lead the country into the deregulated, free-trading economy it would need to become outside the EU.
For retailers, any initial hit to consumer spending as a result of economic uncertainty will be easier to mitigate compared with previous economic shocks – such as the crash of 2008 – because today’s retail models are more flexible and many retailers have not planned for much underlying growth this year.
Next chief executive Lord Wolfson commented on the 2016 outlook when the retailer posted preliminary results last month. He said: “The year ahead may well be the toughest we have faced since 2008.”
Retailers should therefore perhaps be more concerned about existing concerns around the fragility of underlying economic growth, as well as Brexit.
That applies both at home and abroad as the global economy continues to soften and policies implemented during the financial crisis, such as quantitative easing, unwind.
Would a vote for Brexit hamper cross-border trade?
For retailers, there is a clear advantage to being part of a customs union, enabling quick and easy movement of goods and services across borders.
If a Brexit vote prevails, it is likely the UK government will have to implement EU customs controls on exports from the UK.
This would be difficult given that 44% of UK exports go to the EU, compared with the 8% of EU exports that go in the opposite direction.
The change would have an impact on retail, particularly as ecommerce grows.
of UK exports go to the EU
of EU exports go to the UK
“Around 64% of our retail online exports go to the EU, compared with 44% overall, thus any imposition of tariffs would certainly harm this,” observes Stephen Robertson, chairman of research consultancy Retail Economics.
In addition, an Online Retail Export Index, compiled by ecommerce provider Volo Commerce, indicates that exports account for almost 20% of the developing UK online retail economy, and major Western European markets make up more than 50% of export destinations for the UK’s online entrepreneurs.
A 2015 report from strategy consultants OC&C revealed the UK as the second most popular online overseas retail destination for both China and the US
Even if trade with the EU did weaken following a Brexit vote, however, trade with other countries would likely be strengthened in the mid- to long-term as the UK would start agreeing its own trade deals with non-EU nations.
There exists a sizeable opportunity for UK retailers outside the EU. A 2015 report from strategy consultants OC&C revealed the UK as the second most popular online overseas retail destination for both China and the US.
If the Brexit vote goes the way of the Eurosceptics, retailers should keep a close eye on which nations the UK government seeks to strike trade deals with first during the two-year treaty negotiation window to leave the EU.
For those whose biggest overseas market is China, for instance, the hope would be that it is a priority.
What about a Brexit impact on the supply chain?
Retail supply chains could be affected if the UK were to impose import tariffs on suppliers from the EU, adding to supply chain costs overall and prompting retailers to review pricing.
Retailers with flexible cost bases and those that source locally are most likely to be the best placed in terms of negating this consideration.
Retailers need to ensure that they are well positioned to react quickly to any cost changes in the supply chain, and that depends upon having a better understanding of what non-EU suppliers can provide if an increase in output is required.
Would ecommerce growth be stunted by Brexit?
The UK is a world leader in digital commerce, and retailers have been at the forefront of adopting new technology.
If a Brexit became reality, the UK technology scene – given its developed and market-leading nature – is expected to suffer some pain from losing access to the EU’s Digital Single Market, being created at present.
The aim of this reform is to make it easier for consumers and businesses to take advantage of EU-wide opportunities, while fostering a culture of digital innovation across the single market to rival global technology hubs.
of start-up executives said leaving the EU would have a negative effect on their business
In a recent survey conducted by the Silicon Valley Bank, 72% of start-up executives said leaving the EU would have a negative effect on their business.
That will concern retail businesses that have traditionally scoured the globe for start-ups to bring new ideas to their own operations.
It could also reduce the digital talent pool in the UK, which, in a recent survey of retail executives working in digital and ecommerce conducted by Retail Week, was described as a ”major headache” for advancing the digital capabilities of retailers.
What would be the effect on retailers of immigration restrictions imposed if the UK left the EU?
A Brexit would enable the UK Government to develop a more restrictive immigration framework, if it so wished.
Some commentators argue that a reduction in labour supply because of immigration restrictions could lead to a naturally higher level of underlying wage inflation for retailers in the mid-term.
of retail jobs are accounted for by EU nationals
Labour is one of retailers’ biggest costs, so the industry is sensitive to wage inflation.
But evidence from the British Retail Consortium (BRC) shows that 4% of retail jobs are accounted for by EU nationals, so tighter immigration is therefore unlikely to add to the already substantial inflationary pressures being felt across the retail sector as a result of the introduction of the national living wage and the 2017 implementation of the Apprenticeship Levy.