Brexit Choices 1

For our latest blog , we thought we’d see if we can add anything to the ‘Brexit or not’ debate. We’ve tried to be neutral and objective – or, at least, started with that intention – but it’s hard when researching the arguments in the business press, as opposed to the popular press, to find a balance of arguments on both sides.

Throughout this blog we talk in terms of directionality rather than the false specificity of statistics. The rare statistics quoted are as accurate and verified as those oft quoted by both parties in the debate so far. Read that how you will!

These articles are not necessarily the view of Zupplychain , its shareholders, investors or employees, nor its members. We invite registered providers to offer alternative views which we will publish, subject to the usual caveats of decency and editing. But be quick: R-Day approaches fast!

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A key difference we want to highlight from the start is between the long run and the short run. In the long run – going out 15-20 years - supposed neutral reports (albeit largely from the ‘stay’ financial community) don’t paint much of a difference in outcomes. However, in the short run (0-5 years), most predict a negative impact.

The Brexit campaign’s response to this has largely been to duck the issue – whilst broadly refuting it, they have not really provided a convincing argument for any short term economic upside. If the UK were not in the EU, it may have been hard to construct a compelling argument for joining but, equally, now that the UK is in, it’s hard to believe that leaving would be advantageous. And even though predictions around the long run may be marginal in either direction, it pays to remember that the long run is a function of how the short term pans out. This exacerbates the high forecast risk for the long term, as the short term forecast ranges from “a bit bad” to “very bad indeed”. And as Keynes said, “in the long run, we are all dead”.

A similar point is that macro-economics is driven by decision making at the micro-economic level. Individual economic behaviour is as much about what you believe the next person is going to do as what you believe you want to do yourself. Hence, in periods of high uncertainty, irrational decision-making can overturn all rational modelling and, put simply, economies spiral into recession (and worse). In the 1930s, only militarisation in the anticipation of war turned the global economy around it out. Japan has been in sclerotic semi-recession since the early 90s. And whilst the recession of the last decade is largely over (at least in the UK), it generally still only feels as buoyant as the mid ‘90s, rather than the Brown boom of the early 21st Century. In all three cases, world or local economies were knocked from equilibrium by a shock and took an age to stand up again.

So having started this blog with the conclusion, what are the specifics and how will they affect the UK logistics industry?

Largely, our answer looks at the effect on the logistics industry’s customers: retailers, manufacturers and, ultimately, consumers; we’ll then finish with some points for logistics specifically.

The UK Economy and Retail

With some exceptions – noticeably Next’s Simon Wolfson – the retail industry is not welcoming Brexit, despite that it is a largely domestic sector. The biggest risk to retail is the underlying macro-economic risk: uncertainty at best, recession at worst. Even with a ‘half full’ view of this risk, there could be a small negative effect in H2 2016 to early 2017 from the ‘investment on hold’ effect of the pre-referendum period.

Sterling will probably go down in a Brexit scenario (assuming the city hasn’t already price in a ‘no’). This will not be permanent – if Brexit has limited negative economic impact in the short term, sterling will revert to its appropriate underlying level within 12-18 months. In the meantime, higher import prices equal higher in-store prices leading to lower volumes.

With sterling on the slide, interest rates may have to go up to stem the decline, though not much given that EU rates are essentially negative (and the corollary of a UK recession or slowdown in the face of Brexit is not a rest-of-EU boom!) – one can expect limited economic impact from a small interest rate hike, unless the popular press makes a big meal of it and poisons consumer sentiment.

And so to unemployment – Lord (Stuart) Rose, head of ‘Stronger in Europe’ (and former M&S CEO) claims that 3m jobs are associated with EU membership, or over 10% of UK jobs. Whilst it might be possible to understand the maths behind this, your writer hasn’t wasted his time checking it: ‘associated with’ is a meaningless phrase in this context. The unemployment risk hinges only marginally on ‘associated with’ the EU, and much more about the macro-economic risks of the next five years.

But what drives these macro-economic factors? It’s a bit about the exchange rate, but most important is the effect of uncertainty on business investment, almost regardless – at least in the short term – of whether that uncertainty reflects fundamentals or not. When businesses don’t invest, it’s not just a case of buying less capital goods from Germany or Japan, but about people investment, new jobs, marketing, product development. The hatches get battened down.

Labour costs in retail: without the current numbers of lower-cost EU employees keeping down pay rates, it is argued that a Brexit will increase costs, thus prices etc. This is fallacious – labour costs are going to increase anyway with the living wage and Brexit (or not) makes no difference. There could be a productivity effect if one buys the argument that we benefit from educated and motivated young eastern Europeans.

Whilst researching this piece, we discovered an argument that Brexit may put off those large UK retailers who are investing in growth in Europe, We’re not sure it will make much difference – taking retailing overseas always has a horde of subtle and complex factors to consider; ‘in’ or out’ in itself won’t make much difference. And it’s not as if investing in the US – famous graveyard of many a UK retailer – is an alternative.

Finally, the biggest red herring of the lot – the saving of the UK’s financial contribution to the UK. This is less than 1% of GDP, not much different to what the government commits in aid to developing countries. Unfortunately, the “Leave” campaign have played the emotional card here and already hypothecated this to the NHS, and post-Brexit Prime Minister Johnson or Gove may be bound to follow through. Whilst this may be the best place for it, it is arguably the least likely to have a multiplier effect on the rest of the economy.

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Next week, we’ll have the second part of the article, where we’ll look at the potential impact on manufacturing and on the logistics industry as a whole.