‘No-deal’ Brexit would hit supply chains and services hard, warns Euler Hermes

Failure for the EU and UK to reach a fair trade deal under Brexit negotiations would have big implications for supply chains and services, according to Euler Hermes. In a webinar, Euler Hermes’ Europe economist Ana Boata sketched out three possible scenarios for Brexit negotiations. The credit insurer sees a 55% chance the EU and UK will reach a limited fair trade agreement. There is only a 25% chance of an extensive deal – where key sectors would be tariff-free and services would have substantial agreements – being agreed. Worryingly, Euler Hermes believes there is a 20% chance that ‘no deal’ on trade and transition arrangements will be reached, which would see EU/UK trade revert to World Trade Organization (WTO) ‘most favoured nation’ rules. Under this scenario, the service sector would lose passporting rights and goods would be subject to tariffs. In the absence of a trade agreement on services, service exports would be subject to additional costs, including non-tariff expenses like additional regulation, according to Ms Boata. This could add between 20% and 30% to the cost of UK services exported to the EU, resulting in lost exports of £36bn, according to Euler calculations. Goods exported from the UK to the EU would be on average 5% higher, but greater in certain sectors – 18.5% for food and agriculture, 14% for electrical and more than 9% for machinery and automotive. Exported goods losses from a no-deal situation are estimated at £30bn. In addition, tariffs and customs checks would play havoc with supply chains, explained Ms Boata. “Supply chains are very important to the UK. Goods that are often finalised in the UK come from the EU and outside the EU, so there could be a drastic change in the cost and time for production. Tariffs, regulation and the question of whether companies will move, could have a significant impact on supply chains,” she said. This unfavourable scenario would likely push the UK into a recession during the year of Brexit, most likely 2019, according to Ms Boata. A ‘no-deal’ scenario would impact the majority of sectors, although law firms and consultants could benefit from the need for advice as companies accelerate the move from the UK to the EU, she said. However, Euler Hermes expects the most likely outcome of negotiations will see the UK leave the EU in an orderly manner in 2019. However, it is doubtful that a trade deal can be agreed in this time. Ms Boata believes that the EU and UK can agree transitional arrangements. Euler believes there is an 80% chance of a transition agreement being reached that runs until 2021. After the transition period, a limited fair trade agreement would take effect that would have far less impact than the ‘no-deal’ scenario. This is the most likely outcome from negotiations, Euler believes. In this scenario, economic growth would be lower but the UK economy should remain resilient and narrowly avoid a recession, believes Ms Boata. However, even this scenario would see the UK potentially lose £14bn in services exports and £12bn in goods exports. The average tariff on goods would be 2%-3%, while additional costs for services would average 10%. According to Ms Boata, the next two years will see the UK negotiate its exit from the EU and current WTO membership. It is currently a member via the EU and will need to apply in its own right. The UK would also need to negotiate trade deals with some 50-plus countries outside the EU, although it is likely to prioritise the US, China, Australia, New Zealand, Brazil, Gulf States and India. The UK economy has started to deteriorate and some key economic indicators do not suggest the environment is about to improve. Ms Boata noted that the UK economy has undergone a “pronounced” slowdown in recent months. The housing market has begun to slow and consumers are “rapidly” losing purchasing power, she said. A high dependency on imports has helped drive up consumer prices by 2.9% in May 2017, reflecting the 9% depreciation in sterling since May 2016. At the same time, real wages have been contracting and consumer confidence falling, while household savings rates have reached the lowest level in 50 years. Companies continue to face high uncertainty and investors have been taking a “wait-and-see” approach, said Ms Boata. As a result, mergers and acquisitions have fallen 35% since May 2016 as larger deals are put on hold, she said. Euler is also seeing a “worsening trend” in payment behaviour, as well as a rise in business insolvencies. Insolvencies have been on the rise for three consecutive quarters and Euler expects a 5% rise this year. UK businesses are seeing margins squeezed as they struggle to pass on increased costs of imports, explained the credit insurer.

‘No-deal’ Brexit would hit supply chains and services hard, warns Euler Hermes

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