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The 11 key points from Woodford IM's new Brexit study

Neil Woodford's investment firm has partnered with Capital Economics to produce an in-depth report into Brexit.

As the sixth round of Brexit negotiations commence, Woodford Investment Management (WIM) has partnered with Capital Economics to produce a report on the UK.

The study looks at the current state of the country following last June's referendum, while offering a range of economic forecasts. 

It highlights that the economy will be impacted by one of three scenarios - No deal, Compromise deal or a a deal with ambitious policies.

WIM described the report as 'innovative', combining indepth analysis with a wide range of economic impact studies, and fresh research,

'Broadly speaking, we agree with many aspects of the report and its key conclusions, and have found the report valuable, interesting and ultimately, from the perspective of our investment strategy, very reassuring,' Woodford said. 

'It reinforces our confidence that the portfolios are positioned appropriately for the long-term outcomes that are forecast. That is why we want to share it with you.' 

The report - which views a compromise deal as the most likely scenario - explores how the three possible outcomes could impact regulation, immigration, manufacturing, financial services, life sciences, property, construction, public finances, consumers as well as general macroeconomic impacts.

As the sixth round of Brexit negotiations commence, Woodford Investment Management (WIM) has partnered with Capital Economics to produce a report on the UK.

The study looks at the current state of the country following last June's referendum, while offering a range of economic forecasts. 

It highlights that the economy will be impacted by one of three scenarios - No deal, Compromise deal or a a deal with ambitious policies.

WIM described the report as 'innovative', combining indepth analysis with a wide range of economic impact studies, and fresh research,

'Broadly speaking, we agree with many aspects of the report and its key conclusions, and have found the report valuable, interesting and ultimately, from the perspective of our investment strategy, very reassuring,' Woodford said. 

'It reinforces our confidence that the portfolios are positioned appropriately for the long-term outcomes that are forecast. That is why we want to share it with you.' 

The report - which views a compromise deal as the most likely scenario - explores how the three possible outcomes could impact regulation, immigration, manufacturing, financial services, life sciences, property, construction, public finances, consumers as well as general macroeconomic impacts.

Trade

Outcome: Negative over the short term, postive over the long term 

‘The EU is Britain’s largest trading partner, but has been declining in importance and is likely to continue to do so. Nevertheless, with Britain likely to leave both the single market and the customs union in due course, it is likely that trade with Europe will decline in share terms,' the report states. 

‘However, Britain will have the opportunity to pursue valuable new trading agreements with a wide range of countries outside Europe, where most of the global growth is now occurring.

‘The evidence suggests that Britain’s departure from the single market will be less important than the free trade agreement. It is doubtful that many of the non-tariff barriers that allegedly could accompany the former event would actually be imposed, particularly in the near term given the starting point of complete regulatory equivalence.’

Regulation

Outcome: Postive over the long term

‘There is a significant body of evidence to suggest that EU regulations across a very wide range of areas have added to the costs of business and, in a substantial number of areas, may have had a net cost for the economy overall.

‘However, Capital Economics believes that there is high uncertainty around the political feasibility of substantially repealing most of these laws. Instead, Brexit may offer the UK the opportunity to pursue a different regulatory path in the future, potentially making it more competitive.

‘As a result, the scenarios present a range of regulatory gains to output, from zero in the low case to 1% of output in a high case by 2027.’

Immigration

Outome: Immigration to halve, positive if skill quality of migrants improve

‘Migration from the EU has been high in recent years, but has dropped following the UK’s decision to leave the EU. It seems likely that measures to reduce immigration will be introduced after Brexit.

‘Policy may change to restrict the number of low-skilled workers entering the country, but could also move towards attracting more highly skilled workers (including from outside the EU).

‘Moreover, it is unlikely that the future immigration regime will involve a ‘hard land border’ between Northern Ireland and the Republic of Ireland.’

‘Given the responsiveness of migration to policy changes in the past, it is plausible that measures to restrict free movement will act to reduce the number of Europeans seeking to move to the UK, especially if this takes place in the context of stronger economic growth in the eurozone.

'Our base case is for a reduction in EU migration from current levels (around 130,000 per annum) to between 60,000 and 70,000 per annum after 2021.'

Manufacturing

Outcome: negative, although limited

‘Manufacturing exports to the EU account for around 90% of total British goods exports to the union.

‘They also make up some 35% of value-added production in the sector. With trade in goods being regulated by single-market rules and with the third highest share of EU workers, the effects of Brexit, both positive and negative, on manufacturing may be stronger than in many other sectors’ cases.

‘In the high and, to a lesser extent, base-case scenarios, the trade loss on the European side is not likely to be too large and this allows the gains from other markets to dominate, resulting in robust 10-year growth rates of 1.8% and 1.5%, respectively, over the period from 2017 to 2027.

‘In the low case, the losses are dominant and growth is only 1.0%. These compare with the 1.1% annual growth rate over the 2010-2016 period. About half of the 0.4% gains in the expected ‘compromise deal’ case come from higher productivity and the other half from the boost from new trade deals.’

Financial services

Outcome: Negeative, but limited

‘The loss of passporting rights will have an effect, but the proportion of business that will actually relocate will likely be a small fraction of the industry.

‘Euro clearing is a more likely loss, but Brexit will open the possibility for Britain to gain a regulatory advantage over continental rivals and possibly to negotiate trade deals that are more inclusive of, and favourable towards, financial services.

‘The City of London will likely remain a hub of prosperity after March 2019. London’s pre-eminent position as a global financial centre predates the single-market, and the City possesses intrinsic advantages which will endure.’

Life sciences

Outcome: Postive, for now

'Pharmaceutical exports and the UK’s place in the launch sequence of medicinal products should be unaffected by Brexit, while the relocation of the European Medicines Agency (EMA) seems unlikely to have much of an effect.

'Participation in many life sciences-related EU programmes is possible for countries outside the union, and Britain could continue to be involved. There are potential benefits in terms of deregulation, cooperation with the United States and perhaps some of the much-discussed £350 million a week for healthcare!

'The net effect is likely to depend on very detailed aspects of the ultimate settlement – including the intellectual property protection regime and the question of whether imports of cheap generic drugs from other countries will continue. Overall, the industry shouldn’t be adversely affected by Brexit and could see net benefits in a high-case scenario.'

Property

Outcome: Neutral

'Capital Economics expects the performance of the property sector, a relatively well-insulated industry, to be more influenced by the performance of the broader macroeconomy than by Brexit itself.

Demand for commercial property is more sectorally diverse than is commonly realised, which suggests that concerns that a post-Brexit financial services slowdown will prompt a correction in commercial property prices appear over-played, as does the only modest increase in anticipated supply.

'Most foreign purchases in domestic commercial property are for investment rather than operational reasons, and, as a result, they are more related to the overall performance of the British economy rather than the nature of the trading relationship with Europe.

'Brexit will only cause a fall in prices if it causes a large shock associated with a recession and high unemployment. However, we do not expect it to have this affect. Accordingly, even in a low-case scenario, prices still rise by 1.4% per annum over the next decade, and, in other circumstances, they will not be far off the 3.5% seen in recent years.'

Construction

Outcome: Neutral to bad

'Construction is relatively insulated from developments with respect to trade as the industry exports and imports relatively little.

'In general, we expect the sector to be fairly unaffected by Brexit but it would be vulnerable to any economic slowdown or contraction in total demand.

'It could make small gains from lesser regulation, but lose out in terms of fewer EU citizens in the workforce.'

Based on the fact that we do not expect the macroeconomy to be significantly harmed by Brexit, construction output should expand by 1.7% per annum over the course of the next 10 years in a base case for the sector.

'This is lower than the 2.9% experienced between 2010 and 2016. The drop is not particularly attributable to Brexit, but rather to the fact that the sector is unlikely to continue to outpace the economy as a whole, especially given the pressures from the public and retail construction slowdowns. However, near-term Brexit uncertainty will also contribute.'

Public finances

Outcome: Negative

'For the public purse, the issues are obviously the Brexit bill and the level of ongoing contributions to the EU in future. Capital Economics estimates a base-case bill of €38 billion (£33 billion), which also covers payments for a one-and-three-quarter-year transition arrangement.

'Thereafter, Capital Economics anticipates that Britain will probably wish to participate in some EU programmes, but that the payments will be small.

'In the event of no withdrawal agreement being reached, that would probably result in Britain paying nothing more to Brussels other than its ordinary contributions for the period up to the end of March 2019.

'[However] Instead, a level of participation in EU contributions along the lines of Switzerland’s seems most likely. This would see net contributions fall from €12 billion presently to around €0.8bn – or by 93%.'

 

Consumers

Outcome: Negative

'Consumption held up well immediately after the referendum, but lower sterling / higher inflation has since weighed on household spending and consumer confidence to a degree. This may to reverse in the months ahead as inflation declines.

'No deal may mean further sterling weakness, which could be detrimental for consumption again. However, the primary influence of consumer behaviour will be the performance of other parts of the economy such as the labour market and longer-term real wage growth.

'Consumption could be boosted modestly if the UK adopted lower tariff schedules than the EU.'

 

Overall macroeconomic impact

Outcome: Neutral

'There are good reasons to think that the British economy will continue to perform well whether or not it is inside or outside of the EU.

'For example, the UK benefits from a prestigious higher education sector, a large pool of skilled employees in high-value sectors such as finance, biotechnology and information technology, good transport connections, a welcoming political environment, the global status of London, and a strong rule of law.

'In the ‘no deal’ scenario, without a withdrawal agreement with the EU, there are negative impacts stemming from high levels of uncertainty and EU trade being subject to tariffs and more non-tariff barriers, plus difficulties in ‘grandfathering’ existing trade deals, loss of access / equivalence rights and perhaps actual disruption to trade.

'Nevertheless, it cannot be ignored that markets and policymakers will react to those events. Interest rates would likely be very low, there would be no need for any contributions to Brussels after March 2019, and the government would probably react by cutting some taxes and perhaps supporting affected industries with subsidies.

'Hence, we believe that even this scenario would not result in a major slowdown or recession, though it is to be expected that there would be some economic dislocation in 2019.'

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