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By
Fibre2Fashion
Published
Jun 21, 2016
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Brexit could depress British retail sales

By
Fibre2Fashion
Published
Jun 21, 2016

A decision by Britain to leave the European Union would have profound consequences for the future of both the UK and the EU, The Economist Intelligence Unit has said in a report titled ‘Out and down: Mapping the impact of Brexit’. Britain votes on June 23 whether to remain in the EU or leave it.



“We expect real GDP in the UK to be 6 per cent below our baseline forecast by 2020 if voters elect to leave. This economic pain would be coupled with political instability, as significant doubts emerge about government cohesion. The impact will be serious, and prolonged,” it said.

As the Brexit debate has accelerated, some big names in retail have come out against a vote to leave. Last month, Sir Terry Leahy, Justin King, Marc Bolland and Sir Ian Cheshire jointly issued a statement outlining reasons to stay and the former chiefs of Tesco, Sainsbury’s, M&S and Kingfisher respectively are among the closest thing to royalty that retail has.

Tesco’s expansion under Sir Terry was so rapid that five years and two successors later the company is still struggling to find a way to manage the empire he built. Similarly Justin King oversaw 36 consecutive quarters of sales growth at Sainsbury’s, a feat made even more impressive given that much of it was achieved during the global financial and subsequent Eurozone crisis. Ironically King’s final trading statement marked the first of six consecutive quarters of decline for the retailer which continues to face a tough operating environment. Sir Ian himself oversaw a share price improvement of 120 per cent during his spell at Kingfisher. Marc Bolland’s M&S performance was slightly more chequered but history may credit him as the CEO who helped cement the retailer’s transition from clothing towards value added food.

“Either way when these four statesmen of retail say that Brexit 'could be catastrophic for the consumer recovery on which so much of our economic stability depends', businesses sit up and take notice. Further weight comes from Andy Clarke, Asda’s chief executive who used the findings of another Treasury study to add that a Brexit would create an uncertainty in pricing that cements a Remain position for the WalMart owned retailer.

“The Remain campaign has successfully rolled out an array of respected figures in the business community to support its view that a Brexit would be economically damaging. For its part the ‘Leave’ campaign draws on the support and combined experience of a host of politicians including former chancellors of the exchequer. But when you consider that one of these, Norman Lamont, oversaw Black Wednesday when a run on sterling forced a withdrawal from the ERM at a reported cost of £3.4bn to the UK economy, then the economic claims of the Leave campaign appear to hold a little less credibility. Not only do Leahy et al force the world of retail to sit up and take notice but they are also difficult to fundamentally disagree with,” the report said.

As the economic outlook outlines, leaving the EU would cause an economic shock. It will create a period of uncertainty. Consumers will retrench and consolidate income and expenditure as they watch and wait on the outcome of negotiation. The value of sterling will fall which, at the very least, means that prices will rise in line with the cost of imports.

For retailers there will be further shocks. The supply chains and agreements that have evolved on an even playing field with partners in the EU will need to be revisited as the goal posts begin to move. Regulatory requirements relating to safety, quality and consumer protection that are currently consistent across member states will diverge. This will force retailers to consider two sets of rules when assessing their offering between the UK and Europe. Rather than cutting red tape Brexit could make the situation even more complex for retailers seeking to offer comparable services across countries. There are also mutually beneficial schemes that opting out of the EU will bring an end to and put British Retailers and suppliers at a competitive disadvantage. Opting out of the Common Agricultural Policy could affect agricultural supply chains for British farmers.

A Brexit will also impact on involvement in the single digital economy, which has particular ramifications for the UK’s highly developed e-commerce sector which would enjoy a comparative advantage on an even playing field. All of these will add to the cost and complexity of doing business which will either be passed onto consumers or borne by retailers who may have to shed jobs or fall victim themselves.

In mitigation to those campaigning to leave, the alarmist language may be overblown. Just as frostier diplomacy is unlikely to lead us down a path to world war three, rising inflation on the back of a falling pound is unlikely to see prices skyrocketing in the way that they did during periods of hyperinflation in Zimbabwe or the Weimar Republic. Economic declines will be damaging but not cataclysmic for retail.

“We predict that if a referendum does result in the UK leaving the EU then there will be a short and relatively sharp retail shock, with sales volumes flattening out in 2016 before shrinking by around 3 per cent next year. Following this there will be a muted recovery while the terms of exit are finalised before sales flatline again in 2019 when departure becomes a reality. After this retail volumes in are expected resume a more stable growth trend by 2020, but the lost years will have set retail back, with nominal sales in 2020 likely to be about 6 per cent lower if the UK leaves when compared to the baseline scenario of remaining, “ The Economist said.

Those voting to leave may wish to do so for political or regulatory reasons but, despite the alarmist language used by the Remain campaign, the economic reasons to stay for retail far outweigh those to leave, The Economist concluded. 

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