As 2016 comes to an end, the immediate fallout from the Brexit referendum has not had as big an impact on the UK as some had initially feared. In fact, the UK is widely expected to finish 2016 as the fastest-growing G7 economy. However, Dun & Bradstreet (D&B) expects Brexit’s impact on the UK economy to be much stronger going forward. This sentiment is backed by a Brexit survey commissioned by D&B in November 2016.
The survey, based on the responses of 200 CFOs/financial directors in medium or large UK-based companies, indicates that corporations in the UK will reduce future investment as they consider Brexit to be financially damaging for their companies’ growth models. The effects will be especially felt after the government invokes Article 50 in March 2017.
Worryingly, 64% of survey respondents either strongly agreed or agreed with the statement that Brexit has negatively impacted business growth potential. Furthermore, 58% support the view that Brexit will eventually have financially damaging repercussions. As a consequence, a majority of survey respondents (albeit a small one, 49% versus 42%, with the rest being undecided) say that their company is likely to scale back on investment activities in the UK post-Brexit.
The biggest worry for companies concerns data availability from European partners and customers once Brexit is completed (41%). Another concern is lower growth opportunities because of a loss of single-market access (27%), followed by concerns about rising compliance-related costs (16%).
The main culprit for the slowdown will be a drop in investment, but consumer spending will also take a hit. This is because of rising inflation rates that will outstrip nominal wage growth, thereby reducing living standards and also undermining consumer confidence in the UK.
November 2016 figures from the Office for National Statistics show that consumer prices increased by 1.2%, still below the Bank of England’s (BoE) 2% target but at a two-year high. Looking ahead, the weak pound, despite having regained some ground in the past month, will keep import prices high, and inflation should start to overshoot the BoE target from mid-2017 on.
Positively for domestic real-GDP growth, the weak pound will help British exporters and thereby counterbalance some of the negative Brexit impact, at least for as long as access to the EU’s common market continues (at least until Q1 2019). However exporters to the UK, especially those located in the US, will face lower British import demand on the back of the weaker purchasing power of the pound sterling on global markets.
Although the UK is one of the worst performers in D&B’s country risk rating this year, having fallen by three quartiles in two downgrades since June 2016, the country is still ranked in the “low risk category,” on par with France, Japan, Singapore, and South Korea.
Having previously worked for the European Parliament in Brussels, Markus Kuger joined D&B’s office in Marlow/United Kingdom in June 2010. In his role as Senior Economist in D&B Macro Market/Country Insight Products, he is writing about his home country Germany as well as the UK, France, the Netherlands, and Poland.