LONDON – A messy Brexit will be damaging to all. Thats the cautionary message an economic consultant delivered to a recent industry conference. Stephen Le Roux, head of economics at the U.K. Chemical Industries Association, told delegates at the ICIS World Base Oils and Lubricants Conference last month, The present negotiation strategy means that an ideal outcome is unlikely to be on the table at this stage.
In analyzing the possible scenarios, he posited the following timeline:
- March 2017 – Article 50 Bill receives royal assent.
- March 9, 2017 – EU Summit and likely triggering of Article 50.
- March/April – Start of Article 50 negotiations with European Commission.
- Autumn 2018 – Conclude negotiations with EU to give U.K. and member states parliaments time to approve the agreement.
- March/April 2019 – U.K. exits the European Union, unless all parties agree to an extension.
Realistically, allowing 18 months for Article 50 negotiations is unlikely to be enough time to implement a new free trade agreement, Le Roux said. A transition agreement would be needed to cover trade arrangements until a full free trade agreement could be negotiated. This could take years.
Consumers have been the main driver of U.K. growth, according to Le Roux, with private consumption showing a 2.8 percent uptick in 2016. Private consumption represents 60 percent of the U.K.s gross domestic product, but higher inflation and sluggish wage growth is already reducing consumer spending power. And while investment makes a relatively small contribution to current growth, he noted that it is very important for future growth, particularly for capital-intensive manufacturing.
The International Monetary Fund predicts that global growth will pick up in 2017, but this outlook is highly dependent on successful fiscal expansion in the United States and China. The euro area needs reform, and a weaker pound [down 17 percent since November 2015] is expected to help U.K. competitiveness in export markets, but only if firms drop prices to gain market share.
Actions by the Bank of England appear to have prevented interest rates from rising in response to increased uncertainty. In addition, consumers remain positive and credit conditions have been supportive. But inflation due to Brexit and rising commodity prices (especially oil) will sap spending power, Le Roux warned. Investment has not collapsed but has weakened, and a lack of certainty will weaken it further.
He related that the effect of Brexit on world trade depends on the outcome of the negotiations. Leaving the EU Single Market and EU Customs Union will have consequences for European trade. Tariffs will increase the cost of trade, and other non-tariff barriers will slow down trade, increase costs and stop some activities.
But most companies are resilient and resourceful, and market opportunities mean solutions will be found, he added, while cautioning that a poor resolution to Brexit will damage not just the U.K. but Europe as a whole. Thats because Europe is a high-cost, highly regulated manufacturing location, but the single market helps producers take advantage of economies of scale by organizing production at the EU level rather than the national level.
Le Roux also pointed out that the America First policy of the new U.S. administration could possibly be far more damaging than Brexit. The Trans-Pacific Partnership and Transatlantic Trade and Investment Partnership will probably be abandoned. And there will likely be some changes to the North American Free Trade Agreement. These actions will have implications not only for trade but also on geopolitics and the world economy.
Regarding the potential impact on base oil and lubricants markets, Le Roux focused on the EUs automotive and manufacturing sectors. Automotive manufacturing growth, which is a key driver of EU manufacturing growth, is likely to be slower in 2017. But overall, EU manufacturing started 2017 in a strong position with supportive external demand.
Car registrations showed strong growth in 2016, with 14.6 million units sold. But passenger car sales are expected to increase by only 1 percent in 2017, depending on fair access to world markets.
Overall, the EU managed 4.8 percent growth in 2016. And project management information systems show increasing manufacturing confidence, particularly in developed nations. A strong finish to 2016 for most nations resulted in EU production expanding by 1.7 percent in 2016, compared with only 0.3 percent in the U.S.
Le Roux concluded, Brexit is an unprecedented event for the EU. So far, the U.K. and other European economies have escaped relatively unscathed. But it wont last, and European competitiveness will suffer.