© Skypixel Business | July 08, 2016

What could Brexit spell for Europe, EMS and the UK?

On June 23, 2016, people in the UK voted – by a small margin (52 vs 48%) – to leave the European Union. The key argument or perhaps lack of it, was centred upon immigration to the UK from other EU states under the principle of free movement of EU people.
Peter Brent, Consultant Editor for the The European Electronic Manufacturing Services Report at analyst firm Reed Electronics Research, has given us an initial analysis on what happened and what may come in the future.
  • The UK was split in the voting with under 45’s voting to remain and over 45 voting to leave with the bias being more notable at the ends of the age spectrum. Additionally, the more affluent and better educated were in the majority to remain whilst the less well-off and those with fewer qualifications and skills were largely voting to leave. Urban and city dwellers were more likely to remain than residents in the countryside.
  • Despite some calls for a re-run of the referendum and a repeal of the result from Parliament, it is almost impossible to imagine the ‘Leave’ result being overturned and people must accept that the UK is out of the EU. The future of Scotland and Northern Ireland is not clear since they both voted to remain in the EU but the overall UK vote to leave means that they must either leave against the will of their people or find some compromise with the EU which may include full EU membership or some accommodation which gives advantageous benefits to those countries.
  • The UK and the EU are now in a twilight period where the official departure cannot begin until the UK triggers Article 50 of the EU constitution and although the EU wish to move ahead quickly with the negotiations, the UK itself is in some political turmoil due to the resignation of Prime Minister David Cameron, the election of a new Prime minister plus the Labour opposition party is itself in a leadership and ideological crisis. It is unlikely that article 50 will be triggered until end October 2016 at the earliest and perhaps the end of the calendar year 2016.
  • The greatest test for the UK in the forthcoming months and years is both the negotiation of new trade agreements with the EU and the rest of the world (since being in the EU the UK was under the umbrella of the EU trading agreements) and untangling itself from many other national and EU regional agreements and laws which are enshrined in the UK’s legislature during its 40 year membership. The EU is predictably closing ranks and vigorously countering any ‘contagion’ effects from other existing members. It desperately wants to avoid the exit of another country from the EU club and is likely to make negotiations with the UK quite difficult to discourage any other countries from leaving and putting in place reforms which go some way to answer concerns on immigration, accountability of EU officials and dispensation of the budget, that other EU countries share with the UK.
  • However, aside from politics, the companies in the EU who trade with the UK, and vice versa, will want to see trade tariffs established quickly in order that the economic relations with the UK and EU can be normalised. The nub of the negotiations will centre around what the UK will want, notably access tariff free to the EU market, but the EU will demand that this can only come with the free movement of people which was the main reason that the UK voted out. How this will be compromised is not yet clear.

Looking at all of this, what does its actually mean for the UK, the economy there and its trade partners across the EU and the rest of the world.

“The future timeline in our view now falls into 3 areas. The first is what happens up to the trigger of Article 50, secondly what happens in the following two years, including any extension of the negotiating period, and third, the steady state, or not, when the UK has concluded its negotiations and is now ‘sailing alone’ as an economic entity”, states Peter Brent.

The economy in the three stages

Stage 1. – edging up to the Article 50 trigger: This is likely to take some weeks, even months, and requires that a new leader of the Conservative party and Prime Minister is elected. In parallel with this leadership election the UK will be assembling a negotiating team and agreeing strategy which will hopefully lead to a successful closure on tariff and trade between the UK and the countries of the EU. In this period the pound sterling is likely to stay low and the FTSE 100 and 250 to be moderately volatile perhaps +/- 10 percent but more realistically perhaps at +/- 5 percent.

Investment decisions are likely to be put on hold and although some contingency plans will be drawn up by many international companies, probably no real action will be taken yet. We may expect some sabre rattling from both sides. The civil servants in the UK will also be preparing a list of countries that the UK will wish to initiate trade talks. Consumers in both the UK and the EU will be cautious and key investments or major purchases are likely to be delayed, but not necessarily cancelled.

Stage 2. Article 50 is invoked and negotiations begin: No doubt there will be many leaks of information or points of argument by both sides but at the end of the day, it is in the best interests of both to come to some kind of strategic agreement. The atmosphere from Brussels is that the French and Belgians in particular are angry with the Britain and may want to encourage a strong negotiation to show other potential leavers from the EU that this potential action does not pay. On the other side, Germany, Netherlands and some other Northern countries want to see a good resolution to trade talks which benefit all sides and keep good relations with the UK.

However, these attitudes will shift and there is no doubt that there remains in Brussels and the EU, shock and resentment in the manner in which the UK referendum was conducted. The EU is likely now to pursue quickly the path to federalism and this may affect the negotiations ahead. Although the talks following article 50 being triggered are scheduled to be completed in 2 years there already exists the possibility to extend this timeline by some years. However, the longer these discussions continue, the more instability for the future is amassed and the UK may expect to move into a shallow recession.

Stage 3. A new beginning for UK and the EU: It may take many years to conclude trade talks with the EU and of course at the same time, the UK must also agree terms of trade with many other countries. It has to be expected that many of these bilateral talks will result in the UK establishing mutual tariff arrangements but we do not yet know if they will be at the zero tariff level or using the World Trade Organisation guidelines.Some positives for the UK may emerge including a more international shape to the financial services industry and direct trade relations with the growing Chinese, Indian and other Asian economies.

But what does this all mean for the UK economy, and the EMS providers in general?

Prior to the referendum, the OECD, IMF, UK treasury and other bodies all predicted that the UK economy would suffer if it left the European Union. In the IMF case, the experts concluded, pre-referendum, that there were two basic scenarios. The first is for an early resolution of trade talks and a deal similar to the Norwegian agreement with the EU. In that scenario, the UK output is expected to fall by 1.4 per cent by 2019 compared to the baseline case of the UK remaining in the EU.

In the second and more adverse scenario, assuming protracted negotiations and a default to the WTO trade rules, UK GDP plunges by 5.9 per cent to that of the baseline of UK remaining in the EU. Clearly the length of time that the negotiations take and obviously the resulting agreement will influence the potential decline of the UK economy. What happens after that period is open to question.

The effect on electronic production by EMS in Europe is expected to be a little lower in 2016 as a result of the uncertainty in the European economy as we approach the triggering of article 50. "We believe that demand for electronic goods and through to the EMS sector will flatten. As we proceed through 2017 and 2018 overall EMS production is likely to fall but to what extent is very difficult to forecast now. Consumers will rightly be cautious as will commercial and state organisations. The economies of the major countries in the EU are only recently emerging from a low or no-growth phase and the result of the UK referendum could push those economies back into zero growth."

The knock-on effects of a slowing European economy to other world producers is hard to judge but should not be as serious as that of the 2008 credit crisis and may be rather benign since the financial institutions are in a more robust shape than 8 years ago.

Would like to ask your own questions? Peter Brent will be a speaker at the upcoming TEC Lund event in September.
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