“How ‘Brexit’ Could Change Business in Britain”

“The issue of “Brexit” remains divisive in Britain, with little agreement on how it will affect the country’s economy.

Was it a vote in favor of recession, or of financial freedom? Positive economic news is seized upon by so-called Brexiteers as proof that the referendum produced the right result. Negative indicators provide fodder for “Remoaners” who wanted Britain to stay in the bloc.

During the campaign ahead of Britain’s general election in June, voters focused on issues like care for the elderly and national health services. The previous year’s Brexit vote was largely sidestepped.

The effects of the vote to leave the European Union, however, are becoming clearer.

Britain will almost certainly be out of the bloc by the end of March 2019, and Prime Minister Theresa May wants it to be a clean break.

But companies are reassessing their long-term investments in Britain, fearful of how Brexit might affect trade across the European Union. And while Britain and Europe are negotiating over what happens to European Union citizens who now work in Britain (as well as Britons who work in other European Union countries), no one is sure how those talks will go.

Here is how the Brexit vote has shaped business thus far:

7.1

The FTSE 100 index has gone up about 19 percent since the close just before the referendum vote on June 23.

The impact of the vote has been felt most sharply in the markets.

The pound has plummeted, at one point reaching its lowest level in 31 years against the dollar. In the aftermath of the referendum, mutual funds dependent on Britain’s property sector felt the strain and blocked panicked investors from withdrawing their cash en masse.

Stocks, however, have been more resilient. Having fallen just after the referendum, the FTSE 100 – Britain’s benchmark share index – is now comfortably above where it closed on the day of the vote. (One key factor: the FTSE 100 is largely composed of companies that do much of their business overseas, so a weaker currency bolsters their earnings and makes their products look comparatively less expensive outside Britain.)

7.2

The pound has dropped 9 percent since it was valued at $1.47 just before the decision to leave the European Union.

The steep fall in the value of the currency has changed merger calculations for companies around the world.

In some cases, the decline of the pound has created bargains:

·       Softbank, a Japanese internet conglomerate, agreed to buy ARM Holdings, a British designer of semiconductors. (Although the pound was sharply weaker against the yen at the time of the deal, SoftBank’s chief executive has said that the cheaper currency was not the driving force behind the purchase.)

·       The Chinese company that owns AMC Entertainment bought a cinema chain based in Britain.

·       Qatar Airways increased its stake in the parent company of British Airways, citing “an attractive opportunity.”

But the falling value of the currency, combined with increased uncertainty over Britain’s future trading relationships, also cast some deals into doubt, at least briefly.

Anheuser-Busch InBev had to sweeten its offer for SABMiller before it was finally accepted, and the management team at Deutsche Börse had to lower the threshold for shareholder approval of its merger with the London Stock Exchange.

There are even bigger deals on the horizon – international trade pacts that Britain wants to finalize not only with the European Union but also with the dozens of countries with which the bloc has agreements. British officials are hopeful about a trade deal with the United States (President Trump is certainly positive about the prospect of such an agreement), and they are holding informal talks with the World Trade Organization. Australia has said it is ready to do a deal with a post-Brexit Britain as well.

For Britons, there are worries about inflation as a cheaper pound increases the cost of imports. The currency’s decline set off a brief price dispute involving a supermarket chain and the consumer goods giant Unilever, which threatened to take some staples – including Marmite, a divisive yeast-based spread – off grocery shelves. The cost of products from Apple and Microsoft has also spiked.

7.3

  Shoppers on Oxford Street in London in March. CreditOli Scarff/Agence France-Presse — Getty Images

Economic Uncertainty

The British economy appeared to weather the negative forecasts that followed the referendum. But signs are emerging that the country could be feeling the effects.

Inflation has accelerated to its fastest pace in four years, and economic growth has slowed, as well. Wages are not keeping pace with price increases, and Britons are increasingly feeling the pinch.

The Bank of England has sought to respond: After the referendum, it cut interest rates to the lowest level in its 322-year history. The central bank may soon move to cut its stimulus program, though.

Amid the uncertainty, businesses are preparing as best they can.

Around 10,000 finance jobs will either be moved away from Britain, or created overseas, if the country is denied access to the European Union’s single market, according to one survey. Another warns that more than a quarter of major financial companies in Britain say they will move staff members or operations overseas, or are reviewing their domicile status. Major investment banks like Goldman SachsJPMorgan and Morgan Stanley say they will move jobs to the Continent in the coming years to mitigate risks (though Goldman is building a new London office, and a Deutsche Bank unit has bought one as well).

HSBC has said that some of its largest clients have already asked for trades to be routed through offices in mainland Europe, to make sure business continues regardless of the outcome of negotiations.

Even Lloyd’s of London, a centuries-old insurance market, is opening a Brussels subsidiary.

The plans are just a few examples of moves that some fear could harmthe health of London’s financial center, known as the City, which represents a big chunk of the British economy and contributes a disproportionately large slice of the country’s tax revenue.

Other crucial sectors like scientific research and automotive manufacturingare also worried, and even restaurant chains are hiring more British staff members in case foreign workers have to leave. Majorratings agencies have warned that they could could downgrade Britain’s credit rating if it emerges from negotiations on leaving the bloc with a poor deal.

7.4

EasyJet is among the companies that predicted “Brexit” would take a bite out of profit and result in job cuts.CreditBernd Settnik/European Pressphoto Agency

The Great Profit Divide

Before the referendum, warnings about corporate profits were dire. The reality since the vote has been more nuanced.

Businesses in a variety of sectors have predicted that leaving the European Union will take a bite out of profits and could lead to job cuts. Deutsche Telekom of Germany took a large write-down, saying that the vote to leave the bloc caused its 2016 profit to fall sharply; General Motors predicted $300 million in Brexit-related losses this year; and a major recruitment agency said that hiring had slowed.

But it’s not all bad news: Some companies have done well:

-The founder of Dyson, the British company that makes high-end vacuum cleaners and other household items, says he is “enormously optimistic” about the long-term trade prospects, and the company reported a sharp increase in profit.

 

-The brokerage firm ICAP said revenue rose on the back of uncertainty over the referendum and the election of Donald J. Trump.

And because of the fall of the pound, which makes exports seem comparatively cheap, companies that do a lot of business overseas have reported stronger earnings. International sales are increasing for smaller companies, according to PayPal; luxury cars are looking cheaper to foreign buyers; and alcohol companies are also doing well.

7.5

A Nissan factory in Sunderland, England, in 2014. It is Britain’s largest car-assembly facility. CreditOli Scarff/Agence France-Presse — Getty Images

Committing to Britain

Despite the uncertainty, some companies have poured even more money into Britain.

Nissan, a Japanese automaker that is one of Britain’s largest overseas employers, has said it will build a new car at its plant in Sunderland, England, after receiving assurances, not publicly specified, from Mrs. May that the company would be protected from any negative impact from Brexit. Toyota has also promised to make a hefty investment, upgrading its plant in Burnaston.

Overall investment in the auto sector, however, is falling, according to an industry body.

Still, the government is using its own funds to make staying in Britain more attractive. BMW, Ford Motor and Jaguar Land Rover will receive $136 million for the development of low-carbon vehicles and driverless cars.

Elsewhere:

– Amazon says it is creating 1,200 permanent jobs at a warehouse that is already equipped with advanced robotics.

 

-Wells Fargo, the American lender, has agreed to buy a new building in London (though it has also said it is considering creating a new Europe unit). The French bank Crédit Agricole has also extended the lease on its current building.

 

-The company behind Snapchat has established its international headquarters in London, Google is building a new headquartersin the capital, and Apple is following suit.

 

-The French utility EDF has approved a project to build a nuclear power plant in Britain. The British government authorized the project, though not before a review that drew scorn from France and China, which are providing most of the financing.

 

-Geely, a Chinese conglomerate, invested more than $350 million in a new plant for the London Taxi Company, which it rescued out of bankruptcy in 2013. The plant will make electric versions of the iconic black cab.

 

-Qatar said it would invest more than $6 billion in the British transportation, property and technology sectors.”

 

Source: www.nytimes.com

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