Uncertainty. It is the keyword best describing the state of the British economy in the run-up to the referendum on the 23rd of June. With regards to GDP, the fact that companies don’t know whether they will soon find themselves outside the EU or not, has already taken its toll. In the first three months of this year, gross domestic product expanded only 0.4 percent, down from 0.6 percent at the end of 2015. Compared to the growth levels observed in 2014 and early 2015, that’s a significant reduction in growth.
Likewise, the amount of mergers and acquisitions has gone down (39 percent compared to the same time last year), as has foreign direct investment into the UK. Overall uncertainty has also left its mark on the real estate industry, one of the core pillars of the British economy, especially in London. Buyers have put their decisions for residential property on hold, as have tenants when renting commercial property. According to the Bank of England, mortgage approvals for house purchases fell back appreciably to an eleven-month low in April.
This is likely to continue, should there be a vote for Brexit: “A vote to leave the EU would be liable to see a marked hit to UK economic activity over the rest of this year and in 2017 amid heightened uncertainties, which would likely weigh down heavily on the housing market”, commented Howard Archer, Chief UK and Europe economist at IHS, a market research institute.
The latest victims of uncertainty are the stock market – the FTSE 100, the leading British index, shed 100 billion pounds in just four days – and the pound sterling which trades at eight week lows and is forecasted to decline further in the remaining days before the referendum.
“Wait and see” also seems the option of choice for employers. The labour market has slowed down, there are less new jobs being created. As the Morgan McKinley employment monitor shows, there were five percent less jobs available in the financial industry in London in May compared to April. “The performance of many institutions has not been encouraging”, said Hakan Enver, Operations Director at Morgan McKinley Financial Services. “We still see uncertainty due to the upcoming June referendum.”
Not surprisingly, the confidence of British firms is, according to the FT-ICSA Boardroom Bellwether survey, at a four year low. Only 12 percent are expecting an improvement over the next 12 months, down from 40 percent in December 2015 and 74 percent in July 2015.
Because of its nature, the uncertainty for businesses goes beyond their day to day activities. It remains to be seen whether we will really know much more on the 24th, as a vote for Brexit would trigger a long and difficult phase of renegotiations. Thus, the much hated uncertainty may last way longer than companies might want to think. “With a vote for Brexit, the outlook remains unsure”, John Hammond, a partner at CMS Hasche Sigle, told me on Friday. “There will be more wait and see, companies will delay their decision making even further.”
Both British and German firms have been feeling the effects of uncertainty for a couple of months. Nevertheless, many businesses are not prepared for the impact of a Brexit-vote, with the exception of the financial industry. As the FT found out earlier this week, only a few businesses have taken adequate precautions to prepare for a British exit from the EU, despite the fact that the polls are suggesting a very tight race. Several polls now see the Leave-camp ahead, in some cases with a margin of seven or even ten percentage points.
This lack of seriousness when thinking about Brexit is also indicated by a recent study by the Global Counsel that stated that just over a quarter of FTSE 100 firms identify it as a concern for their performance in 2016. John Hammond, the lawyer at CMS Hasche Sigle, sees his German clients only now waking up to the possible reality of a Brexit vote: “I am telling people that their previous attitude – Brexit will not happen because it does not make economic sense – is complacent”, he said. “German companies are not particularly well prepared.”
The same goes, I fear, for a majority of not only British but also French, Dutch and Belgian companies. At the same time, some of Hammond’s clients chose the other extreme: “Some have been asking whether they can still sign contracts under British law or whether they should wait”, recounted the lawyer.
Ironically, his profession might actually be one of the few winners after a vote for Brexit, during an extended period of uncertainty. Lawyers, management consultants and tax experts are expected to see a surge in demand for their services, as companies struggle to cope with the levels of uncertainty.
But, at least John Hammond would be happy to forgo that business: “It’s not what I would hope for”, he said with a grave tone. “I would not want to benefit from a Brexit.” Unfortunately, there are others, especially on the politics side of things, that don’t have this issue but that will be quite happy to benefit from vote for Brexit.