As industries worldwide awake from their post-crisis slumber, geopolitical concerns—especially Brexit—cast shadows on growth potential.
Business leaders across Britain and Europe are maintaining a neutral response to the UK’s exit from the European Union, even as government leaders there struggle to create a blueprint for a new trade deal. More than a year after the UK voted to leave the European Union, most business leaders say the decision and potential new trade deal has yet to affect their strategic planning efforts, although some are beginning to take steps in that direction, according to a study released this summer by Thomson Reuters.
For those watching industrial and manufacturing markets, however, the uncertainty surrounding Brexit is one of the headwinds to a global economy that is finally “waking up from its post-crisis slumber,” according to Cliff Waldman, chief economist for the MAPI Foundation, research arm of the Manufacturers Alliance for Productivity and Innovation, a U.S. manufacturing research and education group. In a recent industry presentation, Waldman said he expects U.S. manufacturing growth to average 1.7% between 2017 and 2020—certainly not gangbusters, but a vast improvement over the near-zero growth of recent years.
A slowly improving global economy has helped spur the growth here at home, making issues such as Brexit a growing concern.
“Brexit is going to be a slog” on the economy, Waldman said, emphasizing the uncertainty surrounding it, especially in light of the UK’s June vote in which the conservative party lost its majority, weakening Prime Minister Theresa May’s hand in crafting a new deal.
“The lack of a roadmap can only be seen as a negative,” at this point, Waldman added.
But business leaders are maintaining a “wait and see” attitude. The Thomson Reuters study released in August—the first in a quarterly survey of the business implications of Brexit in the UK and Europe—showed that nearly 70% of local businesses are not changing their strategic planning efforts in light of Brexit, although some are taking initial steps. The study polled 200 CFOs from a range of businesses across the UK and Europe. Roughly 30% of retail and manufacturing respondents said they have started scenario planning for the various outcomes of the Brexit negotiations, while 20% of technology- and 17% of energy-industry respondents said they are investigating moving business functions out of the UK. When asked if they expect to change staffing levels in the UK as a result of Brexit, 40% of all respondents said they expect no changes while 34% said they expect a decrease in staffing levels. Just 15% said they expect to increase staffing as a result of Brexit, and 10% said they are uncertain.
Roughly 20% of respondents said they have refrained from expanding operations in the UK in general as a result of Brexit negotiations.
“The results suggest a relatively muted response from business so far—not the knee-jerk reaction some had expected,” said Laurence Kiddle, managing director for the Europe, Middle East, and Africa tax and accounting business of Thomson Reuters. “Concern for the future trade deal between the UK and the EU has understandably caused some companies to hold off from expansion; we see decision deferral until more detail becomes clear.”
The study also asked respondents to list their greatest concerns surrounding Brexit. The top three were:
- Brexit without a trade deal between the UK and remaining EU countries
- Increased trading complexity due to no trading deal being reached
- Depreciation of the British pound
When asked about the greatest potential benefits to their business as a result of Brexit, 51% of respondents said they “don’t think there are any.” A reduction in British taxation, and deregulation within the UK market, came in as distant seconds.
Despite the uncertainties, Waldman describes the global outlook as “brightening.” He cited improving conditions in the Eurozone, growth in Japan, and the end to China’s slowdown as key positives, and added political tension between North Korea and the United States to the list of headwinds affecting the global outlook. The bottom line for those in the manufacturing supply chain here at home? Conditions are better, but still slow.
“[The economy] is not strong, but it’s [the best] forecast we’ve seen in a long time,” says Waldman. “There are more reasons for optimism than pessimism.”