Economics » Brexit demands a coherent new industrial policy

Brexit demands a coherent new industrial policy

Professor Vassilis Fouskas and Dr Shampa Roy-Mukherjee of the University of East London call for a new strategy in the light of a hard form of Brexit.

Brexit has been one of the main sources of uncertainty for most businesses in the UK since the referendum results were announced in June 2016.

Brexit is an unusual kind of shock as there are many unknown political and economic factors that businesses are having to consider such as the political impasse currently affecting negotiations regarding date of exit, the terms on which the UK will leave the EU, the length of the transitional arrangement and how the longer-term relationship with the EU will look like.

Economic factors of uncertainty include unpredictable and fluctuating currency, supply change issues and dampened investor and economic confidence.

Firms operating in the fast-moving consumer goods (FMCG) and retail markets have been significantly affected by Brexit since the referendum results were announced in June 2016.

The immediate depreciation of the pound after the referendum leading to higher import costs combined with higher energy costs, labour costs, higher business rates and, rent prices and interest rates on the one hand and increasing popularity of online shopping on the other have led to record number of store closures.

Even high-profile retailers such as Marks & Spencer, House of Fraser, Debenham, B&Q & HMV have had to announce major restructuring leading to job losses and store closures.

The B2B firms have also had to deal with uncertainties of Brexit mostly in areas of supply chain & inventory management and stalled investment growth. The risk of large delays and disruptions in circulation and delivery of goods between the EU and UK in the case of a No Deal Brexit has led to a significant reduction in investment in 2018.

The slowdown in manufacturing and construction sectors in the UK were also to some extent affected by these uncertainties. The European automotive industry is one of the most tightly integrated industries in the EU with highly complex supply chains stretching across Europe and production relying on ‘just-in-time’ delivery.

The European Single Market provides for a high level of economic and regulatory integration for the automotive industry and a No-Deal or hard Brexit would be potentially catastrophic.

Today, motor vehicle manufacturers operate almost 300 plants across the European continent, often manufacturing components such as engines in one country and assembling vehicles in another.

Businesses working in the pharmaceutical and healthcare industry are anticipating disruption and delay in the delivery on ‘life-saving’ drugs and higher costs of raw material in general.

Firms will also expect to be hit by lack or withdrawal of R&D funding from the EU. It is also expected that regulatory changes in this area may cause major disruption to procurement and production of drugs.

In the case of a No-Deal or hard Brexit the UK financial services sector is expected to move around £1tn of assets out of the UK into Europe.

A survey conducted by EY of 222 UK-based financial service firms shows that they anticipate 7000 high-paid jobs to move to EU as a result of Brexit resulting in a £600m loss to the UK treasury. 39% of 222 firms surveyed stated their intentions to relocate some of their departments to Europe as a direct result of Brexit.

Gauging Brexit effect

To better understand the impact of Brexit on UK business the Bank of England, University of Nottingham and Stanford University have set up the Decision Maker Panel, a survey of approximately 7,500 business executives in the UK. Data collected by Decision Maker Panel from approximately 3000 business executives in the UK shows five interesting facts:

  • In 2016, 36% of firms recognised Brexit to be one of the top three drivers of uncertainty this figure has risen to 54% in Jan 2019.
  • Businesses anticipate Brexit to impact on their costs, exports and sales. According to the survey firms expect total sales to fall by more than 3%, exports to reduce by 2.5%, labour costs to rise by 3.5% and unit costs by over 5% by 2020.
  • Since the results of the referendum investment growth in UK businesses has fallen by 6% in the first two years after the referendum
  • Employment has fallen by 1.5% in the first two years after the referendum
  • The most productive firms expect the biggest negative impact from Brexit. The most productive firms are the ones that are more internationally exposed and therefore whose productivity will be hit the hardest as a result of lower sales and higher costs resulting in a fall in productivity by around 0.5%.

Sage conducted a global survey with YouGov on the topic of Brexit and come up some interesting findings:

  • Only 33% of businesses have started preparing for Brexit, 34% don’t know how long they’ll need and 40% aren’t sure when to start preparations.
  • Whilst 57% of large businesses are concerned about the impact Brexit on their business only 27% Start-ups seemed to concerned.
  • Over 50% of businesses would like more guidance and information on how Brexit will affect three areas of their business namely tax and import duty; safety standards; and personal data storage.

The above facts are hard to deny. Yet, Brexit, in our view, is embedded in wider global trends concerning the crisis of globalisation, decrease in the volume of global trade, especially intra-EU trade, the rise of China and the disruption such rise causes in the transatlantic economies, which are the main drivers of globalisation to which the UK economy belongs.

From this point of view, the British state and its elites have a major task to perform in case hard Brexit turns out to be the only option: advance a coherent new industrial policy for Britain.

This could be driven by a nationalised manufacturing and banking sector, forging new forms of partnership between the public and the private and opening up a new European perspective for the rest of Europe, which still has some Treaty commitments that vaguely remind of democracy and socialism.




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