There are just under 200 days to go until we leave the EU and many are looking at the sky and seeing that the Brexit storm clouds look dark and angry. Business is currently experiencing peak Brexit uncertainty and both the UK and the EU are seriously considering whether the largest demerger in history could yet fall apart.
Back in March this year, we were having a totally different Brexit conversation. The shape of the UK’s negotiating strategy was growing clearer and political agreement on transition had been reached. Big businesses didn’t much like the stance the UK had adopted, although SMEs were more positive – but everyone seemed to be breathing a sigh of relief, happy that change wasn’t imminent.
Today the Brexit business climate is more hostile. Most of the clients I speak to expect significant disruption in the short term (not least around cash flow) then everything from a choppy trading environment in the medium term, right through to a period of chaos – if a deal isn’t agreed.
Back in March we were advising clients that four basic Brexit scenarios were possible: a good deal for business, an acceptable deal, a mitigated no deal and no deal at all. Today we think those four scenarios have shrunk to two: an acceptable deal or a mitigated no deal. We think that now both negotiating parties have taken a serious look at the worst case scenario this option must be off the table. Nobody wants to see a jam at the ports and planes grounded. So if a deal can’t be reached we predict some emergency mitigations will be made albeit at the eleventh hour.
Equally, the opportunity for business to get a deal with clarity about the end game is also off the table. There simply isn’t the time or the political resources to work though the thousands of obscure little details that every sector requires clarity on. So the best case is now an acceptable deal for business – one that goes someway to protecting key sectors and lessening the greatest new costs.
As we look forward to the next 200 days, the question that is posed to me most often is – what is going to happen to the UK economy? This is obviously a challenge to answer, not least because it requires numerous assumptions to be made in order to provide a satisfactory response. Nonetheless, our Chief Economist, Yael Selfin, has looked at the best data available and written a report on what we can see ahead.
The headlines are stark: if the UK government achieves a relatively friction-free Brexit and transition deal, UK GDP will grow by 1.3 percent in 2018 and 1.4 percent in 2019. This would still mark the lowest rate of growth since 2008 and 2009, but if a disorderly Brexit were to occur, we can expect a rapid slowing of growth to 0.6 percent in 2019 and 0.4 percent in 2020. Of course, other factors are also in play, so Yael adds that bringing productivity growth back to pre-2008 levels could see the British economy grow by more than 2 percent.