As Brexit approaches, signs of a gathering economic storm for Britain

The Washington Post

By Griff Witte December 13 at 5:16 PM
LONDON — From a modest office in a small town in northeastern England, Elliott Peckett’s family stocked the world with costumes.

Billowy white Marilyn Monroe dresses. Red velvet Santa caps. Rhinestone-studded Elvis jumpsuits.

They were shipped out by the millions to 42 countries across the globe, and they brought the profits of countless Halloween parties, Carnival parades and Christmas wonderlands back home to England.

But thanks to Brexit, not anymore. After 122 years, Peckett’s costume company, Smiffys, is moving its headquarters to the Netherlands.



“One word sums up the issue: uncertainty,” said Peckett, the company’s director. “Any business needs as much certainty as it can get around the cost of goods or the markets you can trade in. But right now you don’t know where you are from one day to the next.”

That uncertainty has become a defining feature of the British economy since the country stunned the world with its June 23 vote to exit the European Union. And although the initial economic impact has been milder than many feared, there are signs of a gathering storm as businesses opt to shift operations overseas rather than stick it out in the U.K.

Nearly six months after the vote, the shape of Britain’s post-Brexit relationship with Europe remains a mystery. Prime Minister Theresa May has declined to say exactly what she wants from the two-year negotiations she has said she’ll trigger by March, a timetable that would put Britain outside the E.U. by the summer of 2019.

With divorce proceedings not even begun, businesses have been left to guess where the talks could end up. Many are planning for the worst, expecting that the country will wind up outside both the common market for commerce within the E.U. — the world’s largest — and the customs union that governs trade between E.U. members and the rest of the world.

For those firms, preparations go well beyond contingency planning. They have advanced to actively scouting out new homes for work that needs to be done from within the single market.

“If you need to have an investment banking operation up and running in Europe in 2019, you need to start now,” said Mark Boleat, policy chairman for the City of London, the skyscraper-strewn heart of Britain’s behemoth financial industry.

So far at least, however, no mass exodus has begun. Firms may be planning a move, but they haven’t gone through with it or even announced their intentions publicly. As a result, the true impact of Brexit can be hard to see in macro gauges of the country’s economic health.

Before Britain voted, some economists and pro-E.U. politicians had forecast the gloomy prospect of a nearly immediate recession should the public opt for out. But the dire predictions — derisively dubbed “Project Fear” by the pro-Brexit campaign — have not come to pass.

Britain’s economy continues to grow, albeit relatively slowly. Unemployment levels have remained stable. U.K. stock indexes are modestly up. Some areas of the economy have even felt a bit of a boom. U.K. tourism, for instance, has benefited markedly from a weaker pound, as have British retailers, who are shipping more goods across the English Channel to bargain-hunting European customers.

But in other respects, the warning signs about Brexit’s true economic cost are starting to pile up.

The pound has stabilized in recent weeks. But it remains deeply devalued compared with where it was on the day of the Brexit vote, having plummeted in late June and then again in October. Worth $1.49 on the day of the referendum, it’s down to around $1.26.

The drop is likely to spark inflation next year, economists say, as retailers hike their prices to compensate for the higher cost of imports. The impact could leave a dent in living standards as real wages fall.

The government’s finances, too, have begun to feel the pinch of Brexit. The ruling Conservatives have had to abandon long-held plans to eliminate the deficit and start running a surplus as it has become clear that the economy will need a public-spending-fueled kick-start to keep it from stalling out.

Britain’s treasury chief, Philip Hammond, said late last month that the British economy had been “resilient” following the Brexit vote. But he also acknowledged that Brexit will leave a $150 billion hole in government coffers over the next five years as growth slows and tax revenue falls.

If anything, that may be optimistic. Howard Archer, the chief European and U.K. economist at London-based IHS Global Insight, wrote in a recent briefing that growth could be lower than expected because of the “huge uncertainty over how the U.K.’s relationship with the E.U. will develop over the next few years and what arrangements are eventually reached regarding trade, access to the single market and immigration.”

Perhaps nowhere is that uncertainty felt more keenly than in London’s financial district. The financial services industry accounts for about 12 percent of the British economy, and it supplies over 2 million jobs.

But London’s status as Europe’s preeminent financial hub could be endangered if the Brexit negotiations don’t end with a deal to secure “passporting” rights — the ability for U.K. banks to operate across the E.U.

Boleat, the City of London’s policy chief, said the “prevailing view” in the industry is that Britain is “unlikely to retain the current relationship with passporting.”

As a result, he said, companies are taking “a hard-nosed view of what they need to do.”

A report commissioned by another financial industry group, TheCityUK, recently found that some 35,000 jobs in the sector and $25 billion in annual revenue could be lost in the event of a “hard Brexit” — one that leaves few of Britain’s current E.U. membership privileges intact.

The group’s policy director, Gary Campkin, said rival global financial centers such as New York, Singapore and Hong Kong could be the big winners if Brexit talks turn sour.

But he said companies will be reluctant to move unless they absolutely have to, given the “stickiness” of London’s selling points for financial firms, including its mix of talent, government support and livability.

“People are here for a reason,” he said. “It’s hugely difficult to relocate elsewhere.”

In Peckett’s case, however, he felt he had no choice.

His family-owned costume company, which has been based in the English town of Gainsborough, does 40 percent of its business in the E.U., working on thin margins. The precipitous fall in the pound, the lack of clarity around future tariffs and the uncertainty over what will happen to his E.U. workers in Britain forced him to reluctantly shift the company’s headquarters to the continent.

Government leaders from May on down say they will “make a success of Brexit.” But Peckett doesn’t buy it — and can’t wait around to find out.

“I can’t see any circumstance in which we’re going to get a good deal,” he said, noting the E.U.’s incentive to deter future defections by driving a hard bargain with Britain. “The U.K. is going to come out of this very badly. The impact hasn’t even started yet.”

Karla Adam contributed to this report.