The financial services, healthcare and life sciences, and automotive sectors are likely to be hardest hit, while the effect on consumer goods and retailing, energy and telecoms will be less dramatic.
The UK will formally leave the EU single market in March 2019 but will manage to agree an FTA before the end of a transition agreement in December 2020, predicts a new report released today by The Economist Intelligence Unit (The EIU).
The report quantifies the impact of Brexit on six sectors, ranging from financial services to automotive and healthcare. It also outlines the potential consequences of a “no-deal Brexit” scenario, in which talks break down entirely in late 2019.
“The transition agreement provides business with some certainty that they will have time to adjust to the new UK-EU relationship,” says Ana Nicholls, managing editor for The EIU’s industries services. “Even so, Brexit will cause disruption that may be difficult to manage, and there is still the possibility of a cliff-edge departure in 2021.”
The main issues facing the UK government during the negotiations will involve trade, regulation, employment and skills, access to investment, and future policy. However, the EU will resist any attempt by the UK to cherry-pick from the benefits of membership.
Even with the transition deal, we forecast that real GDP growth will slow to 1.5 per cent in 2018 and 1.4 per cent in 2019 before accelerating to average 1.8 per cent a year in 2020-22. Under a no-deal Brexit, there would be a heavy depreciation of the pound in late 2019, with a sharp drop in UK export sales growth in 2021. By 2022 the UK’s nominal GDP would be 2.7 percentage points lower than under our baseline scenario.
Even under our core scenario, any deal for the financial services sector will be limited, with higher regulatory barriers affecting bank assets, derivatives markets, fund managers and insurers. However, London will retain its position as a global financial hub.
Spending on healthcare will continue to rise, but could be up to £90 per person lower under a no-deal Brexit, reflecting a slowdown in tax revenue growth. Pharmaceuticals costs could rise if sterling falls further and non-tariff barriers increase. But the worst-case scenario—a shortage of much-needed medicines—is likely to be avoided through regulatory agreements.
In the automotive sector, UK vehicle-makers will try to expand in other export markets, but will also need to stimulate domestic demand. Under a no-deal Brexit, vehicle sales would be about 13% per cent lower in 2022 than they would be if the UK secures a comprehensive free trade deal.
The loss of EU workers will affect most consumer goods manufacturers, pushing down exports and increasing prices. A no-deal Brexit could result in retail spending being 13.4 per cent lower by 2022 than under our core scenario. In the energy sector, the UK will continue to forge ahead on emissions reductions and decarbonisation, while the country’s exit from the “digital single market” could mark the end of roaming rights for telecoms customers on the continent.