Businesses in the United Kingdom have already endured more than three years of Brexit uncertainty. Now, as the third deadline to leave the European Union zooms by, companies are left to grapple with a profoundly unpredictable domestic political situation that will further erode business investment.
Companies had been cautiously optimistic that Prime Minister Boris Johnson would remove the immediate threat of a disorderly break with the European Union by pushing his Brexit deal through UK Parliament ahead of the latest October 31 exit deadline. He failed to secure approval, instead seeking another extension from Brussels while demanding a UK general election on December 12.
A completed deal on Brexit, even one that harmed the economy by erecting new trade barriers between Britain and its largest export market, would have provided businesses with some of the policy certainty they have been craving. That, in turn, might have encouraged CEOs to start spending more money on equipment, factory upgrades and expansions that have been delayed because of uncertainty over Brexit.
By setting aside his deal in favor of an election, Johnson has once again plunged UK businesses into the dark about the future terms of trade with the European Union, and the rest of the world. CEOs must now consider a broad range of outcomes: UK lawmakers may grant Johnson a general election, or they may not; Johnson may triumph at the polls, or be replaced as prime minister by Labour Party leader Jeremy Corbyn. The deal Johnson struck with the European Union may eventually be revived, or it could be shelved next to the one negotiated by his predecessor, Theresa May.
One of the few certainties is another delay and more economic pain. On Monday, the European Union approved a Brexit extension until January 31.
“A delay … is not a huge blow for the economy, but by prolonging the uncertainty it’s an extra drag,” Paul Dales, chief UK economist at Capital Economics, wrote last week in a research note.
According to Capital Economics, Britain could be headed for a situation where a “zombie government” contributes to a “zombie economy and a zombie pound.” The group’s economists estimate that Britain’s economy, which contracted for the first time in seven years in the second quarter, would be consigned to sluggish growth of around 1% in 2020.
More than three years of uncertainty have already taken a toll. Business investment growth has declined for five of the past six quarters, according to UK government data. Researchers from Stanford University and the Bank of England found that uncertainty caused by Brexit has reduced investment by about 11% and decreased productivity by up to 5% over the three years since the June 2016 referendum.
Manufacturing has been particularly hard hit. According to Make UK, a trade group, nearly two thirds of manufacturers say that Brexit delays and uncertainty have had a direct negative impact on their profit margins over the past two years.
The UK Society of Motor Manufacturers and Trader estimates that investment in the auto sector was down 70% to just £90 million ($115 million) in the first six months of this year. Foreign carmakers that used Britain as a springboard to the rest of Europe have meanwhile scaled back their commitments in the country.
Honda (HMC) is planning to shut down a major factory in England that employs 3,500 people. Nissan (NSANF) has scrapped plans to build its new X-Trail SUV at its factory in Sunderland. It said uncertainty over Brexit was partly to blame. French carmaker PSA (PUGOY) has warned that continued production of the Vauxhall and Opel Astra in the UK depends on the country’s terms of trade following Brexit.
All told, companies are likely to face at least four and half years of uncertainty over Britain’s relationship with the European Union. Even the Brexit divorce deal negotiated by Johnson includes a transition period until the end of 2020 that is designed to give Britain time to negotiate a new trade agreement with the bloc.
One big problem: that probably doesn’t leave enough time to settle the huge number of complicated issues that would be included in a new trade agreement, raising the possibility that Britain would ultimately crash out of the bloc at the end of 2020 without the terms of a deal in place. For business, that outcome would be even worse than more uncertainty.