Brexit outcome has implications beyond Europe

A new report released by Interact Analysis talks about the impact of Brexit, which is the looming departure of Great Britain from the European Union. The exact way Great Britain departs the EU is a matter of continuing political wrangling, and how it ultimately occurs will have an impact beyond Europe.

In his analysis of the issue, “From a manufacturing perspective, there are two main risks that Brexit brings to bear: how much will it hurt the UK manufacturing economy, and to what extent will the export of U.K. manufactured goods be affected?” said Adrian Lloyd, research director for industrial automation for Interact Analysis. “Let’s address the second item first. The concern here is that post-Brexit, the UK’s ability to sell goods to the EU, its largest trading partner, could be compromised depending on the Brexit scenario enacted.”

But Brexit is just one of a number of issues facing global manufacturing, and Lloyd discussed those issues with CFE Media as well as the direct and indirect impact on the U.S. economy:

CFE Media: So much of the Brexit discussion has assumed some sort of soft landing. How much disruption do you see if the U.K.’s exit from the European Union happens through an agreement with the EU? 

Lloyd: In my mind, the two things are synonymous: a soft landing occurs as a result of an agreement being put in place with the EU. Our position is that this is the most likely scenario, so the forecast presented in the article in effect reflects what will happen in the instance of a soft Brexit.

CFE Media: On the other hand, how does a hard Brexit impact U.K. manufacturing, both from an import and an export standpoint? 

Lloyd: Assuming a no-deal scenario takes place, two things will happen of note. First, without a treaty in place to accommodate the movement of goods, there will be inevitable delays affecting both imports and exports. These will likely be short-lived, as we suspect the chaos that would ensue would provide sufficient motivation to address the problem through some sort of temporary agreement, but they would be disruptive nonetheless.

In addition to delays, tariffs will be applied to goods moving between the U.K. and the EU, which would increase the cost of products being purchased on either side. Second, in all likelihood, sterling would further depreciate versus other currencies making UK products appear less expensive and stimulating export opportunity.

However, what is needed to take advantage of this are agreements with countries outside of the EU to enable movement of goods with little or no tariffs. The largest non-EU economies, such as the U.S., China and Japan, are obvious targets, but putting in place a suitable agreement will also take time.

So, in short, a hard Brexit would drive up the cost of imports, increase their delivery time, while at the same reduce demand for U.K. goods for the same reason. We tentatively estimated that the effect could impact overall manufacturing output for the U.K. during 2019 by as much as negative 10 percent, compared with negative 3.3 percent for a soft Brexit scenario.

Q: While the U.S. has its own trade issues at the moment, how does Brexit impact U.S. manufacturing from your analysis? What are the opportunities and challenges here? 

Lloyd: Good question. I would say that the U.S. would be motivated to get an agreement in place with the U.K. fairly quickly. The “special relationship” still thrives between these two countries, and we suspect the U.S. would be happy to get an agreement in place, which would be positive for U.S. manufacturing. Food is a good example of an industry that could benefit, but many others too.

How quickly this could be put in place is unclear, however, as President Trump tends to drive a hard bargain and the UK might be tempted to wait until 2020 to see if there is a different administration to negotiate with. Additionally, there is that gnarly problem of weak sterling, which will make U.S. goods look expensive.

In the short term, the impact would be fairly small; but in the mid- to long-term there is strong opportunity for U.S. manufacturers to benefit from the UK as a strong export region, and vice versa.

Q: This seems to be a fragile time for global trade, and by extension for global manufacturing. What are your views on how the world is reacting to all this uncertainty. 

Lloyd: Average growth for manufacturing output over the last 11 years was 5.3 percent. Our projection for 2019 is 0.8 percent. This would represent the worst year since 2009’s financial meltdown. Different regions are reacting differently. China is experiencing a tremendous slow down for various reasons.

We have a really good article here where we discuss the reasons why. Europe looks to be the most affected, and we are projecting a 1.1 percent contraction in the region; of note both (Asia Pacific) and the Americas are anticipated to experience small growth during this period. On the whole a very fragile time for global trade and manufacturers – many of which have told us recently of increasing concerns for 2019 and beyond.

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