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Comment: breaking up is hard to do – a rough patch before the biggest divorce in history?
Gavin Matthews

Following the UK's historic vote to leave the EU, the Government has to give notice under Article 50 of the Lisbon Treaty, which will be followed by at least two years of negotiations on the terms of our exit and the conclusion of new agreements with our trading partners.

GENERAL MERCHANDISE

Comment: breaking up is hard to do – a rough patch before the biggest divorce in history?

Following the UK's historic vote to leave the EU, the Government has to give notice under Article 50 of the Lisbon Treaty, which will be followed by at least two years of negotiations on the terms of our exit and the conclusion of new agreements with our trading partners.

Theresa May has signalled that notice will be given by the end of March next year but, at this point, we don't know how long it will take to unpick around 46 years of treaties, agreements and laws. Neither can we be clear about the form our future relationship with the EU will take nor, in particular, whether we will be able to retain access to the single market without agreeing to the free movement of people. How is this uncertainty impacting on the retail sector?

The political aftermath of the referendum included resignations and sackings galore, a new Prime Minister and Cabinet and the threat of the possible breakup of the UK, as Scotland and Northern Ireland both voted to remain in the EU. There's also been some debate as to whether the result is binding, whether the UK can somehow avoid leaving the EU by delaying giving notice and whether a second referendum should be held. The immediate financial impact included a dramatic fall in the value of the pound, a substantial decrease in share prices and the loss of the UK's AAA credit rating. More recently, the pound has fallen to a 31 year low against the US dollar and a five year low against the euro.

The initial reaction to Brexit was a dramatic fall in consumer confidence, even lower than after the 2008 crash. This has improved slightly but it has not fully recovered. Where retailers operate across borders, they have found that sales have increased as overseas customers have taken advantage of a weaker pound. On the other hand, UK retailers who depend on imports have experienced a substantial increase in their costs, which they do not currently feel they can pass on to consumers. Once we leave the EU, if we don't retain free access to the single market, or at least the benefit of a customs union with the EU, it is likely that higher tariffs will apply to many imports. As the UK's largest importers, this will further increase costs for retailers.

In the medium to long term, there is a risk that the UK could head into another recession. We may experience continuing volatility in the foreign exchange and stock markets. There could be VAT and customs changes ahead, which will impact on international retailers, as well as changes to legislation in many different areas that have previously been subject to EU regulation.

A major concern for all employers is how future immigration controls might affect them; it is possible that immigration controls that currently only apply to workers from outside the EU could be extended to EU workers, which would make it more difficult and expensive to employ EU workers.

Looking further ahead, it is feasible that the UK vote could lead to other countries leaving the EU. The resulting instability would pose a further risk for retailers.

Although a period of uncertainty is bad for any business, the long run up to the date of our departure from the EU does at least give retailers a chance to plan for the future. Now that we know we are likely to exit the EU in the spring of 2019, planning can start in earnest.

 

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