Brexit consequences: what the PM's deal could mean for your sector

26 Nov 2018

Investec

UK economists

Every industry will feel the change of Brexit, but how could the Withdrawal Agreement impact the UK's most significant sectors? 

Cabinet approval of the draft EU Withdrawal Agreement should have granted UK business the respite from uncertainty it so desperately craved. Instead, a string of senior resignations and wide-spread denunciation from both Conservative Europhiles and sceptics mean that hopes of passing the deal seamlessly through Parliament are effectively in tatters, and companies must continue to steel themselves for every eventuality.

Our own view is that a no-deal scenario is extremely unlikely. The momentum behind cross-party action to prevent Britain crashing out of Europe is growing. And while rumblings of discontent continue to emerge from several EU states around access to British waters, and the status of Gibraltar, opposition to a no-deal Brexit is unanimous.

Nonetheless, businesses, especially those in high-impact sectors such as food and healthcare, are understandably rattled by the prospect of a cliff-edge departure. Meanwhile, while the draft agreement provides significant reassurance for many industries in terms of retaining the status quo until the end of the transition period, the Political Declaration that accompanied it, outlining plans for a future relationship, raises as many questions as it answers.

Currency markets have also been unsettled. The pound, which could have been expected to rally upon news that a deal had been reached, took a tumble as Cabinet resignations hit the headlines. Theresa May appears to have faced down the threat of deposition for the time being, but any attempt to topple the Prime Minister would likely see the pound fall still further.

However, given our expectation that a deal will be reached, we expect sterling to strengthen in the medium term. Any cross-party motion, meanwhile, is likely to result in a softer Brexit, that the markets will likely welcome.

Every industry is affected differently by the provisions in the Withdrawal Agreement, the commitments of the Political Declaration and by the tumult that has ensued. For many, a lack of clarity continues to be the biggest challenge. But how could Brexit developments impact some of the UK’s most significant sectors?

Financial services

 
The good news is that the importance of securing a workable, long-term relationship between the British and EU financial services industries has been acknowledged with its inclusion in the Political Declaration. This means it is a sector that has been hardwired into future negotiations.

However, the agreement makes it clear that UK financial services companies will lose the unfettered access to customers across the bloc that they currently enjoy. The industry has been bracing itself for such a change, but while not unexpected, the agreement confirms the considerable challenges that lie ahead.
 
Existing passporting rights have been jettisoned, as have ambitious demands for deep access based on mutual recognition of regulations. Instead, Britain’s financial services industry will be granted the same basic level of access to EU markets as other financial powerhouses such as the US and Japan, based on a system of equivalence.
 
Equivalence assessments are due to be completed by the end of the transition period. Demands for safeguards against market access being withdrawn at short notice have yet to be met.
BoE

The agreement suggests that UK financial services companies will lose the unrestricted access to customers across the bloc that they currently enjoy.

Furthermore, the equivalence regime is only applicable to a limited range of financial services, excluding, for example, both commercial banking and insurance. Law firm Hogan Lovells estimates that three quarters of all EU cross border financial services business is not covered by the rules.
 
In short, those areas of financial services covered by equivalency will no longer have unimpeded access to EU markets but will still be closely tied to EU regulations. For those not catered for by the concept of equivalence, the future remains unclear.
 
The other area of the draft agreement that has particular relevance for the financial services sector is immigration. In 2016, almost one in five workers in the City of London originated from a European country, according to ONS data.
 
The draft agreement guarantees the continued freedom of movement of EU workers throughout the transition period. The UK government will then be free to set its own policies which will have a direct impact on this industry.
 
The draft agreement guarantees the continued freedom of movement of EU workers throughout the transition period. 
In the unlikely event that ongoing political turmoil sees Britain leaving the EU without a deal in place, concerns persist around potential disruption if cross-border contracts are no longer enforceable, including £29trn-worth of derivative deals, as well as disrupted access to European payment systems.
 
Brussels has sought to quell banker jitters by reassuring European traders that they will temporarily be able to use crucial UK derivatives clearing services. However, while these challenges have now been acknowledged, and reassurances are welcomed, talk must be turned to action as uncertainty persists and the Brexit deadline looms.
 

Food and consumer goods

 
With an emphasis on free and unfettered trade for goods, the draft Withdrawal Agreement gives grounds for cautious optimism amongst food and beverage and consumer goods companies. The trade negotiations themselves have yet to begin, but as a statement of intent, it is positive.
 
However, concerns persist about what happens if no trade agreement is reached and the backstop comes into play, both in terms of Northern Ireland’s status and the “level playing field” mechanism that would effectively tie the UK to EU rules on competition, state aid, employment, environmental regulation and some areas of tax.
 
The political upheaval that has accompanied the agreement, meanwhile, means the spectre of no deal still looms large, and costly and time-consuming contingency planning continue, particularly in the vulnerable food industry.
 
A shift to World Trade Organisation terms would have a huge impact on the high proportion of food and ingredients imported from outside the UK, from the Spain and Netherlands in particular, as well as globally traded ingredients such as soy and garlic, that currently fall under EU treaties.
 
Hyped fears about the extinction of the Mars Bar may have grabbed the media’s attention, but more worrying for the sector itself is the issue of distribution capacity caused by traffic jams and a lack of available warehousing as supermarkets and producers stockpile ingredients, packaging and products.
Decisions around the contentious issue of fishing, meanwhile, appear to have been deferred. The UK government had previously pledged to depart from the Common Fisheries Policy once the transition period ends. But the Withdrawal Agreement shows the two sides have yet to reach agreement.
 
It is reported that frozen and chilled warehousing is already fully booked for the next six months with customers being turned away. The fresh product sector is, of course, particularly susceptible to a no deal Brexit, because of the time-consuming checks that would need to be done in harbours and because stockpiling is impossible.
 
There are also concerns that there would be insufficient vets to meet the checks that would be required on live animal transportation.
 
The EU has repeatedly said it will only allow British seafood exporters tariff and quota free access in exchange for a reciprocal agreement that allows EU fishing fleets access to British waters. This is a potentially explosive issue that remains unresolved.
 
Continued access to overseas labour is also a key concern for the consumer goods and, in particular, the food and beverage industries. The loss of European workers since the Brexit vote has already had an impact, increasing wage bills and putting businesses under pressure. The confirmation of free movement of labour during the transition period is to be welcomed but post-Brexit immigration policy will be key.
 

Technology, media and telecoms

 
The draft EU Withdrawal Agreement and Political Declaration on future relations go some way towards alleviating the concerns of the TMT industry. The clear statement of intent to secure the free flow of data between the UK and EU, which is critical to the technology sector and all other sectors embracing the modern digital economy, is to be particularly welcomed.
 
The question of whether the UK would be given a Data Adequacy rating before officially leaving the EU has been highly contentious over recent months. Only non-EU member states are able to embark on this lengthy process. However, in a significant compromise by the EU, the Political Declaration states that the Commission will “endeavour” to make an adequacy decision before the end of the transition period, thereby avoiding any transfer gap.
 
Technology, media and telecoms companies supplying physical hardware, can be reassured about the emphasis on free trade for goods, but are vulnerable in the event of a no-deal Brexit
Reassurance that EU trade marks and designs will continue to be valid in the UK post Brexit, providing they have been negotiated before the end of the transition period, have also been heralded as good news for the sector. But concerns persist around increased friction in trade. On leaving the EU, the UK will no longer be a part of the nascent Digital Single Market, launched with noisy support from the UK government in 2015.
 
Those technology, media and telecoms companies supplying physical hardware, can be reassured about the emphasis on free trade for goods, but are vulnerable in the unlikely event of a no-deal Brexit. Many are stockpiling parts to minimise disruption.
 
For those TMT businesses providing services, meanwhile, details of future trading agreements are uncertain and concerns about being tied to EU technology rules that Britain is unable to influence are high. A quarter of technology companies say they have opened an EU outpost because of Brexit according to a 2018 survey conducted by Silicon Valley Bank.
 
Access to skilled labour is also a key issue for the TMT industry, which currently employs large numbers of coders and developers from the EU.
 
While freedom of movement is guaranteed throughout the transition period, subsequent rules could pose a real threat for the sector.
 
20%
Proportion of European technology start-ups are in London
Competition for points-based migrant workers will grow as British businesses lose access to the vast pool of EU workers previously available without the friction of bureaucracy. Questions also remain regarding the definition of a high-skilled worker, with the touted £50,000 salary threshold inappropriate, according to many in the sector.
 
Meanwhile, London is home to 20% of European technology start-ups. There are fears that a lack of talent will lead to a fall in investment. Britain will also lose access to vital early-stage investor the European Investment Fund.
 

Healthcare


The unhindered flow of almost 1 billion packets of medicines travelling between the EU and Britain, serving 500 million patients, underlines the stakes are high in healthcare.
 
The draft Withdrawal Agreement states that the UK will remain subject to European Medical Agency regulations throughout the transition period, guaranteeing the unfettered flow of medicines and the continued circulation of those licensed before the transition period ends.
 
Proposed data sharing during the transition period with the aim of continued co-operation has also been welcomed. But while the Political Declaration that accompanies the Withdrawal Agreement pledges “co-operation on matters of health security”, there is no clarification on how patients will be protected with respect to medicine safety, public health disasters or infectious disease control.
 
Concerns include preventing fake or fraudulent drugs entering the supply chain and sharing data between EU countries that flags potential problems with drugs.
 
The Prime Minister has previously said that she hopes Britain can achieve associate membership of the European Medicines Agency but the pharmaceutical industry is continuing to demand that the Political Declaration make specific references to the importance of UK and European cooperation on the regulation of medicines, as well as close collaboration on science and innovation.
 
It will be business as usual for medical devices industry throughout the transition period, meanwhile. But concerns remain over a cliff-edge departure, with UK-based companies switching to EU-based authorized representatives in preparation.
 
 
Free movement of labour has also been a hot topic for the healthcare industry, which currently relies heavily on EU workers. Almost 10,000 left the NHS in the 12 months to June 2018, according to data from NHS Digital.
 
Continued freedom of movement and mutual recognition of qualifications during the transition period provides some respite although a lack of clarity over future immigration policy will continue to create problems for healthcare employers.
 

Property

 
As with all sectors, the prospect of a no-deal Brexit is the worst possible of all scenarios, predicted to trigger a recession, property slump, and inflation spike. But it is unlikely that Britain will leave the EU without a deal in place and, in many respects, the UK property market is well placed to prosper.
 
Property investors don’t flock to the UK because of its EU membership. They are, however, attracted by the liquidity of the property market; the transparent and relatively low transactional costs; landlord-friendly lease structures; high regulatory and compliance standards; respected legal process and pro-business culture, including low corporation taxes, the English language, and the fact that the UK is conveniently straddled between East and West time zones.
 
It is no coincidence that companies including Google and Facebook are increasing their footprint in London and while some businesses may be asking employees to rent rather than buy in the short-term and some movement of employees to Europe to mitigate Brexit risk has taken place, no exodus has occurred.
 
 
property
Property investment in the City of London was up 7.6% year on year to £9.47bn at the end of October. The West End, meanwhile, is expected to hit £7.4bn before the year is out, exceeding last year’s total

Savills

 
 
As with all industries, the property industry welcomes certainty and while the final outcome of Parliamentary and EU approval of the Withdrawal Agreement hangs in the balance, the UK property market may experience a hiatus.
 
Office and commercial property owners are reporting greater caution amongst occupiers, typified by longer decision making. Landsec, the UK’s largest listed property developer, meanwhile, has said it is in a pre-Brexit holding pattern, with £3bn of development projects ready to launch depending on events over the next few months.
 
But with the likelihood of a deal being reached and strong underlying characteristics, we expect the UK property market to prove resilient throughout the Brexit process.
 
The opinions and views expressed in the above article are for general information purposes, they should not be construed as recommendations or advice for any individual nor should any action be taken on account of the information presented.  The views and opinions have been provided by Investec Bank plc and are subject to change.