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Brexit confusion could mean a smaller breakfast for Brits

We're no closer to understanding what Brexit will actually mean for consumers and businesses but analysis by some of the leading consultancy firms suggests as many as 75,000 UK jobs could be at risk and price increases for every-day goods are on the horizon.

It's now more than one year since the UK's referendum on leaving the European Union (EU), a month has passed since the UK's general election in which the Conservatives lost their majority in parliament, and several weeks since official negotiations on Brexit began with the EU. But we are still practically none the wiser as to what will actually happen in March 2019 (just 20 months away). No concrete decisions have been made to set out what 'Brexit' will actually mean in practical terms, for businesses, the financial sector and for consumers. It seems likely since the UK's snap election that, with the government's weakened position, a 'softer' Brexit is more likely, in which the UK will make a gradual transition away from EU legislation and agreements, with the possibility of maintaining some of the trade agreements, regulations and equivalence structures.

Banks caught in the indecision

An article in the Economist last week spells out how difficult this lack of clarity is for the banking sector. It says that “banks are trying to keep their options open” rather than making decisions that are hard to reverse, such as moving operations away from London. Setting up a trading floor in another country, for example, can take months while hiring senior staff, such as a chief risk officer, can take up to a year, due to the length of the recruitment process, as well as gardening leave and getting clearance from regulators, etc.

The cost of moving

According to data from EY, 22 investment banks have declared their intentions to move staff out of the UK. And out of 222 companies that EY monitored, 59 said on 4th July 2017 that they had started moving staff or operations out of Britain.

The cost of restructuring is likely to be hefty for banks too, says the Economist, which quotes figures of €15 billion for restructuring banking and capital-markets businesses to maintain the same level of service across the EU, and €70 billion that banks would have to spend putting regulatory capital into legal entities in the EU-27.

Soft or hard?

A report on the impact of Brexit, by Oliver Wyman, also seeks to quantify what will happen after Britain leaves the EU. It's clear that one of the main sectors to be affected will be financial services, which earns approximately £190-205 billion in revenues each year and employs 1.1 million people across the UK. The study puts a cost on the economic fallout from either a hard or a soft Brexit. A soft Brexit, in which the UK is outside the European Economic Area (EEA), but otherwise delivers passporting and equivalence and allows access to the Single Market on terms similar to those that UK-based firms currently have, would see a decline of £2 billion in revenues from EU-related activity, with 3-4,000 jobs at risk.

A hard Brexit, however, would see the UK take up a 'third country' status without any regulatory equivalence, with far greater consequences in terms of jobs at risk and reduced revenues. If the UK leaves the EU without a trade deal in place, it will rely on World Trade Organisation (WTO) rules, which could mean a drop in revenues from EU-related activity of £18-20 billion, with as many as 35,000 jobs at risks a tax losses of £3-5 billion.

The report also notes that there could be additional losses from activities associated with the EU-related activities, meaning that a further £14-18 billion of revenue, 34-40,000 jobs and ~£5 billion in tax revenue could be at risk. It noted: “the knock-on impact on the ecosystem could result in the loss from the UK of activities that operate alongside those parts of the business that leave, the shifting of entire business units, or the closure of lines of business due to increased costs”.

The final outcome is likely to be somewhere in between the two extremes outlined in Oliver Wyman's report.

The great British fry-up

And lastly, analysis by KPMG has found that Brexit could mean a smaller breakfast for Britons. If the UK has to trade on WTO terms after March 2019, then the ingredients that go into a traditional British breakfast (including sausages, bacon, olive oil, orange juice) could incur price increases of more than four times the rate of inflation, according to the audit and tax consultancy. The research estimates that the total cost of a typical family-sized shopping list for the key ingredients for a fry-up would increase from £23.59 to £26.61 – an increase of 12.8 per cent.

KPMG's Bob Jones said: “WTO tariffs could have a significant impact on both consumers and retailers alike – totting up consumer price tags and further squeezing retail margins. It’s important to remember that our analysis does not even reflect the steep costs consumers and retailers are already facing as a result of the pound sterling’s devaluation or the costs of any new non-tariff barriers.”

He added: “If the UK leaves the EU without a trade deal or transitional agreement, we can expect both higher prices and a huge spike in red tape at the borders. As such, the top priority for businesses is to fully understand their own supply chains: the volumes and values of the goods they ship back and forth and which countries they’re importing to and from. Only then can businesses obtain a degree of insight into their own operations and exposure to risk.”

This item appears in the following sections:
Cash & Liquidity Management
Cash & Liquidity Management in Europe
Risk Management
Financial Risk Management
FX Hedging & Risk Management

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