Politicians and pundits discussing a possible British exit from the European Union tend to use big words. “Dire consequences”, “Chaos in the City”, and “Splendid Isolation” make the media rounds.
Granted, investment bankers and city of London financiers stand to lose if people in the UK vote to leave the EU. But a sober analysis of a Brexit reveals that British companies would suffer the most. Our special Economic Insight report, titled ‘Brexit me if you can’, analyses why – and in what ways. [more]
It is unlikely that Britain will vote to quit the EU (a referendum is due before the end of 2017). But the debate surrounding Brexit unleashes a vicious cycle. It increases uncertainty, which affects sentiment and might delay investment decisions. GDP growth could slow down to +2.1% in 2016 and +1.9% in 2017.
What if Brexit proponents manage to win a majority?
Should this happen – not Euler Hermes main scenario – companies’ turnover growth could be halved, if a Free Trade Agreement (FTA) with the EU is signed. They will contract without one.
Three transmission channels will affect companies: direct export losses, falling margins (due to higher input and financing costs) and divestment.
The Economic Research team at Euler Hermes estimates that Britain could lose GPB 30 billion worth of exports if no free-trade agreements with the EU were in place post EU-exit. Even if trade does pick up, it could take up to 10 years to fill the gap.
The introduction of trade tariffs, damage to supply chains, and even disruption to domestic business relationships as a result of reduced foreign investment spell difficult times ahead for many British businesses.
Profit margins could fall by up to 2 points on the back of higher input costs and tighter financing conditions. And although the financial sector will pay the highest price, it will not be the only industry to suffer. The automotive, machinery and equipment, chemicals, agrifood, textile and energy sectors would also be affected.
If European and international companies realized that London no longer serves as a comfortable gateway, they could not be faulted for taking their business elsewhere. The result: Last, up to GBP210bn of foreign investment could be wiped out in the four years following the referendum.
Diminished trade opportunities and a decline in the City of London’s role as a premier hub for global finance would pose serious risks to the private sector in the UK.