Nearly three years have passed since British voters decided that the UK should leave the European Union and embark on the painful process of Brexit. With that vote, the near-inevitability emerged that British-based businesses would face severe consequences, which would in turn affect potential investors drawn to the country. Specifically, such an adverse situation would likely occur as the outcome of a so-called “hard” Brexit, a scenario in which the UK would leave the EU without reaching an agreement to remain in the European market. The “hard” or “no deal” Brexit appears more likely by the minute, since, after facing pressures from her party colleagues, Prime Minister Theresa May resigned – this after her latest push to get approval for her version of the Brexit deal was rejected by her political allies.
This poses a whole set of political, regulatory and psychological uncertainties that are damaging the UK’s long-term business and economic prospects. The damaging impact on the UK economy appears likely, as it does not seem that the UK government is on a path towards formulating a deal that would involve the UK’s orderly withdrawal from the EU, making the probability of a hard Brexit higher by the minute. The key question for UK-based businesses, as well as for international ones, is whether or not the UK will still have access to the European market, even if its departure from the EU takes place. There are other equally painful matters in the background of the process. Namely, the process of leaving the EU and negotiating access to the European market leaves behind unresolved issues such as product regulation and the UK’s access to migrant labor.
Indeed, it is evident from the impact on foreign direct investment that uncertainty has been plaguing the UK economy and business sphere. Since the 2016 referendum, foreign direct investment in the UK dropped almost 20 percent by November 2018 – the sharpest decline since the formal recording of foreign direct investment in the UK started in 2003. During this period, the UK economy lost GBP 1.5 billion, allowing Germany to overtake the UK as the top recipient of foreign investments in Europe. Foreign investment in the UK property market also reflected a decline in faith in the country’s economic future, as the number of foreign real estate owners in London fell from 26 percent in 2010 to 10.5 percent by the end of 2018.
On the other hand, the UK stock market has proven to be remarkably resilient, as in March 2019, the London Stock Exchange was one of the best-performing European financial stocks since the 2016 referendum. However, even with these positive developments, there have been warnings about putting too much faith and capital into UK stocks, particularly as the forecast on the decline of the British economy ranges between a 3.9-percent drop over the next 15 years in case of an orderly Brexit, and a 9.3-percent decline during that same period in case of a hard Brexit.
UK productivity has also suffered as a result of Brexit, with UK productivity growing only by 0.5 percent in 2018. Moreover, there are numerous industry sectors in the UK which will feel the brunt of the Brexit ordeal. Many large companies like Airbus are thinking of relocating their UK operations to the mainland. The UK automobile industry is also under threat, as two suppliers of car parts – Schaeffler and Michelin – have plans to close their UK factories. Additionally, the UK ferry industry is almost certainly going to feel the heat of Brexit, as the UK government will be compelled to cancel its transport contracts with Brittany Ferries, a French shipping company operating a fleet of ferries between France and the UK, as well as a contract with DFDS, a Danish shipping company. This decision incurs cancelation costs of GBP 56.6 million, as the UK government had previously purchased capacities worth GBP 89 million from these two companies.
What makes the Brexit conundrum all the more complicated is the fact that the UK government itself cannot produce a definitive agreement with the EU. Indeed, the Prime Minister May, has asked for parliamentary approval on the withdrawal deal that her government negotiated with the EU three times in 2019. Each time, Members of Parliament (MPs) rejected the deal in a time span of a few months, specifically in January, mid-March, and the end of March. In April 2019, this inability of the UK government to sell the deal to its parliament led the EU to grant the UK another six months to try and reach a deal that can be passed in the UK Parliament and accepted by the UK public by 31 October 2019.
The ability of the May government to push forth the new Brexit deal proved to be extremely limited. Andrea Leadsom, the leader of the House of Commons, resigned from her post in protest over May's Brexit proposal. Consequently, it became more and more evident that May was losing the political backing of both her party and her cabinet for her Brexit plans. The mood was also growing in the Conservative Party that May should resign despite her pledge to fight for her version of the Brexit deal. This caused friction, as May passed her last vote of confidence in December 2018, implying she would not be going through another confidence vote until December 2019. However, her party colleagues were tempted to change the rules, and not with the purpose of replacing May but rather to prevent her from attempting to push another Brexit deal proposal through the UK Parliament.
May ultimately succumbed to pressure, resigning on 24 May 2019. Even if she were able to survive her latest round of political troubles, she would still have acted from a weakened political position, making her ill-equipped to follow through on her policy. With her resignation, the situation gets more complicated, as the UK will have a new prime minister who will have to push through a new deal in a state of total political confusion with very little time at his or her disposal.
Business in Britain is already showing signs of unease due to the debilitating effect that Brexit has exerted on the country’s economic growth and will continue to do. Given the psychological and political anxiety generated by Brexit, with the passage of time, it will be more difficult for the UK government to come up with a deal and exit strategy that can satisfy both the domestic constituency and the EU, making the likelihood of a hard Brexit more realistic.
Although the UK government continues to display an inability to formulate a clear strategy, it does appear that the prospect of hard Brexit is still on its mind. Namely, on 12 April 2019, it was reported that Theresa May instructed the UK’s civil servants to stop devising plans for a no-deal Brexit, even though the UK government had spent GBP 4 billion planning for this scenario prior to that instruction. However, only three days later, another report emerged that a stressed Theresa May had issued instructions to civil servants not only to continue planning for no-deal Brexit, but to deny assertions that contingency plans were being scrapped. The government evidently cannot guarantee on a positive outcome, which is becoming even more evident in light of May’s resignation and vulnerable political position the future Prime-Minister is likely to have. This prospect should raise concern among businesses and private capital extant in the UK market.
Irrespective of what has been said, not all is bleak regarding the UK market and its ability to attract capital. The American investor Warren Buffett stressed that despite the doubt generated by Brexit in both Europe and the UK, he still wants to invest more of his capital in both of these regions. Even though the UK economy still holds promises for British businesses as well as international companies which have invested in the UK, or plan to do so, as the example of Buffett illustrates, Brexit still poses a number of challenges in the future. These challenges revolve around the final deal, as no one is able to confirm what that deal will entail. Until that happens, businesses interested in the UK market will continue to encounter risk that they cannot even define. They can only watch the ordeal through which May and her government go through, and hope for the best.