Study shows Brexit could cost each UK household £1,000

28 June 2018 Authored by Consultancy.uk

Britain’s withdrawal from the European Union is set to cost £1,000 per household, according to a new study. The paper comes on the back of a number of reports which have stated that businesses are increasingly worried by Brexit.

With negotiations with Brussels proceeding at a crawl, the deadline for Brexit in early 2019 is fast approaching. As such, a dreaded “No Deal” scenario is becoming an increasingly likely prospect, something which would see UK businesses hit by sizable tariffs as the nation falls under World Trade Organisation rules, should it walk away from the EU with no agreement in place.

Such is the state of alarm at the poor progress being made by negotiators, that the Trades Union Congress and the Confederation of British Industry have released a rare joint statement on the matter. As cabinet tensions flared into the open over single market access, the workers’ and business organisations said, “We are calling on the UK government and the EU to inject pace and urgency in the negotiations, bringing about measurable progress, in particular a backstop arrangement to avoid a hard border in Ireland.”

The news adds to the revelations of a report by Oliver Wyman, which has shown that Britain could be faced with a Brexit premium averaging £1,000 per household, thanks to red tape resulting from the protracted divorce. As consumer confidence in the UK flat-lines thanks to stagnant wages and depleted spending power on the back of a struggling pound, the news will do little to boost the flagging national economy, which is already facing its lowest growth rates since the global recession.

Duncan Brewer, Partner for Retail & Consumer Goods at Oliver Wyman UK, said, "While the outcomes of Brexit remain unclear, our analysis shows that any scenario will increase costs for UK households.” He added, "Looking across the whole supply chain and taking into account multiple different Brexit outcomes, one thing is clear: Brexit will decrease profits for consumer businesses. The only question is by how much, which will depend on what deal is negotiated.”

Estimated cost of tariff and non-tariff barriers on the UK economy, by sector

According to the study, the annual ‘red tape’ – or tariff and non-tariff – costs of Brexit for UK exporters will be around £27 billion even after initial steps to mitigate costs have been taken. This is equivalent to 1.5% of GVA, and will likely see prices rise dramatically in order for businesses to ensure their profit margins are not impacted post-Brexit. Five sectors are thought to be in line to be hit disproportionately by these new conditions.

Financial services, the automotive sector, agriculture, food & drink, consumer goods, and chemicals & plastics are estimated to contribute 70% of extra costs arising from trade barriers. While the financial services sector has long been billed as facing the worst backlash from Brexit, with some 75,000 jobs touted to leave British shores after the UK’s separation from the EU, the ramped up prices of the food & drink and consumer goods sectors are more likely to be giving average households sleepless nights.

The Oliver Wyman analysis subsequently anticipates that a supermarket chain with annual takings of £10 billion would see profits fall by a third under the most benign Brexit scenario modelled. As a result, prices would need to rise by 2.3% to compensate the business made as much profit as it did pre-Brexit. As a result of the increased paperwork and delays for customs checks arising from Brexit, household will likely increase by a minimum of 1% a year, or £250 per household, and this could rise to £1,000 in the event of a hostile “No Deal” scenario.

Proportion of firms that trade exclusively within the EU

New red tape is also likely to see small and mid-sized businesses suffer the worst knock to their profitability and pricing. Only 19% of exporters which employ ten or fewer staff trade exclusively outside of the EU, and would subsequently avoid the changing conditions. While 21% export to both the EU and beyond, the vast majority of 60% trade exclusively within the EU. This segment of an estimated 87,000 firms is the largest portion of firms in the UK which export, compared to the estimated 3,500 firms with a headcount of more than 250 which export. Only 11% of these larger businesses trade exclusively within the EU, while a larger 30% are only extra-EU exporters.

Since SMEs have been noted as a particular driving force behind the UK’s 42-year low in unemployment, this could present a notable challenge for the UK’s labour market. As smaller firms attempt to adapt to life amid heightened export costs, one of the first places some may look for savings is in their workforce.

Brewer concluded, "While businesses will do all they can to absorb rising costs, we expect they will be forced to gradually put up prices for shoppers. If they don't, profits could vanish."

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