Monday, July 22, 2024

Brexit and its effects

Britain’s decision to leave the European Union has caused panic in world markets, although the exact effects on retail are not likely to be known for some years.

The UK will leave the EU after 43 years, with UK citizens opting out of the body in a referendum on June 23. The ‘Vote Leave’ campaign garnered 52 per cent of the vote, with the ‘Britain Stronger in Europe’ movement only gaining 48 per cent after failing to convince voters of the merits of avoiding ‘Brexit’.

UK Prime Minister David Cameron, who supported Britain remaining in the EU, announced his resignation following the referendum and is expected to depart before October. Scotland, Northern Ireland and a majority of districts in London voted to remain in the EU, while Wales and the rest of England voted to leave.

The UK must now invoke Article 50 of the Treaty of Lisbon (2009) to activate its release from the EU. The divorce process will take at least two years following the triggering of Article 50 before Britain will receive the ‘take it or leave it’ terms of its exit, as decided by the remaining EU member countries.

British grocery

There are major concerns in the British grocery industry about the effects of Brexit. According the Food and Drink Federation in the UK, 71 per cent of its members wished to remain part of the EU.

“Keeping the cost of goods down for consumers and providing certainty for businesses must be at the heart of the Government’s plans for life outside of the EU,” British Retail Consortium CEO Helen Dickinson said.

Grocery prices will be affected by the falling pound, leading to more expensive imported food. By the time it was clear that the ‘Leave’ side would triumph, the pound has already dropped eight per cent, its lowest level since 1985. The prices of grocery goods are also likely to be affected by the reimposition of customs duties and trade barriers which were removed by the UK’s membership of the EU.

In 2015, the UK exported £134.3 billion ($241.4 billion) to the EU, while receiving £223 billion ($400.9 billion) in imports from the EU. When accounting only for grocery goods, the UK exported £10 billion ($17.9 billion) and imported £25.9 billion ($46.5 billion). The UK is not self-sufficient in food, with around 38 per cent of it being imported.

“In its exit negotiations, the Government should aim to ensure that the trade benefits of the Single Market [ie, the absence of customs duties] are replicated in the UK’s new relationship with the EU,” Ms Dickinson said.

Innova Market Insights analyst Heather Johnston believes that this outcome would be unlikely.

“Tariffs and quotas will not change immediately, but any negotiation is highly unlikely to bring better terms than previously as a member of the EU and, of course, if the UK wants to sell within the EU, CE [European Conformity] standards and all the other food safety, quality and nomenclature rules will still apply,” she said.

IGD Retail Analysis outlined that new barriers to trade may present UK businesses with opportunities to serve domestic demand, although reduced trade could mean less choice and higher prices for shoppers. Much of the future terms of trade between the UK and the EU depend on the attitude of the remaining EU members. There have been suggestions that the EU could make an example of Britain in order to deter remaining EU members suffering buyer’s remorse from attempting their own versions of Brexit.

Brexit may reduce some of the labyrinthine EU regulation ‘Leave’ voters considered overly burdensome, but exports would still have to comply with EU standards.

Membership in the EU meant free movement of labour in the EU, and the possibility of reducing immigration to the UK was one of the ‘Leave’ side’s key arguments. However, any decrease in immigration will lessen the workforce available to UK grocery retailers. A large number of the 400,000 employed across the grocery industry previously were born outside the UK.

Additionally, the EU provided British farmers with subsidies under its Common Agricultural Policy, with these subsidies supplementing a hefty chunk of UK farmers’ funding. These payments will be removed by the UK’s exit.

In terms of overall economic outlook for the UK, the country’s treasury estimated in a report in April that British households would be £4,300 ($7,731) worse off if it left the EU, with a GDP 6.2 per cent lower after 15 years if it was outside the EU.

Australian grocery 

The specific effects that Brexit will have on the Australian grocery industry are still unclear. The main consequences are likely to be as a result of instability and loss of confidence, which are predicted to interrupt growth internationally. Whether or not the disruptions will lead to a global downturn is up for debate.

The day after the UK’s intention to leave the EU became clear, the ASX dropped 3.69 per cent (relatively little compared to the Japanese Nikkei’s eight per cent loss) and $2 trillion was wiped off markets worldwide. This short-term volatility may not last. The Reserve Bank has acknowledged the risk of continuing financial market instability flowing on from the Brexit vote, although the overall effect on Asian markets, and by extension, Australia, should be relatively small in direct terms. Nonetheless, an RBA rate cut in the next couple of months is now a distinct possibility.

The UK is Australia’s seventh largest trading partner, with around 1.5 per cent of goods and eight per cent of services exported to Britain. It remains possible that Australia will be able to negotiate relatively favourable post-Brexit trade deals with both the UK and the EU.

Before the recent election, both sides of politics attempted to use the Brexit vote for electoral gain. Prime Minister Malcolm Turnbull said that the Coalition was the party of stability in times of international uncertainty, while Opposition Leader Bill Shorten compared Mr Turnbull and his party to David Cameron and the ruling – and divided – Conservative Party in the UK.

At this stage, it is too early to predict precise, or in some cases even general, outcomes of the Brexit vote on the world economy and, more specifically, Australian retail and grocery. It is an unprecedented situation and will likely lead to a number of unprecedented outcomes.


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