EU Referendum

How will you vote?

There are several dimensions to the arguments that Brexiters and Bremainers have been using to make their case. Sovereignty, immigration, regulation, trade and the economy have been the main ones. However, for accountants and bookkeepers, it will be trade, economy and regulation that matter most for business.

8 June 2016

Brace yourselves for Brexit

Brexiters assert that leaving the EU would give us more sovereignty, allow the UK to control immigration, help us reduce burdensome regulation and allow us to increase trade, particularly with emerging economies outside the EU. Hence, it would be good for the economy in the long term.

Bremainers argue that we already have sufficient sovereignty, and that any deal with the EU that allows us to retain the all-important access to the single market would actually reduce sovereignty. Norway and Switzerland both, for example, have to follow all the EU single market rules and regulations without having any influence on them. Both Norway, as part of the EEA, and Switzerland, which has a series of bilateral trade deals with the EU, have to accept open immigration from the EU as a condition of access.

What's more, institutions such as the OECD say that the UK is already one of the least regulated rich economies, and many of the regulations considered most burdensome are home-grown in the UK. Bremainers argue that much of what is considered to be “excessive EU regulation” will, in fact, need to be replaced by domestic laws in the event of a Brexit, thus swamping the UK parliamentary agenda for years to come.

A fair summary of the discussion is that while the UK may be able to reduce or modify regulations in certain sectors of the economy,

we will not see the “bonfire of regulations” that the Brexiters have promised.

On trade, the consensus from institutions such as the UK Treasury, the IMF, the OECD, rating agencies as well as independent academics and think tanks appears to be that volumes will fall significantly in the event of a Brexit. The EU’s import tariffs of 10% in the auto sector will affect manufacturing negatively, and of 21% on beverages and up to 45% on dairy products would affect farming and retail. The UK is also likely to impose countervailing tariffs, if only to have a better negotiation position for future trade deals. This will make imports more expensive, at least in the short run. However, the biggest negative impact will be felt in the services sector, which is also the largest sector in the UK economy. The all-important UK financial sector, for example, will lose its “passport” to operate seamlessly in the EU single market, costing it heavily in terms of revenue and profits.

There is also consensus amongst international and domestic UK institutions, including the Her Majesty’s Treasury and the Bank of England that a Brexit will trigger a recession in the UK. Rating agencies, banks and analysts also confirm this view though there is great uncertainty about the depth and length of this recession. The OECD has called Brexit the biggest political threat to the global economy, so the negative economic consequences may not simply be limited to the UK alone, but may trigger a generalised slowdown in the EU and more broadly. In the immediate aftermath of a pro Brexit vote,

most experts expect a sharp drop in sterling, as well as other big dislocations and high volatility in financial markets for bonds, equity and real estate.

This will have a big negative impact on business, both domestic and international. Mark Carney, the governor of the Bank of England, has warned that a Brexit will push growth significantly lower and inflation significantly higher. The London School of Economics is predicting a loss of 2.2% of GDP and Standard & Poor expects market volatility.

In fact, the uncertainty created by the referendum has already had very real consequences, resulting in negative impact on businesses and investment, and thus overall growth. Companies are delaying decisions on expansion, new investments and recruitment until there is more certainty about what it going to happen to the UK economy. As reported by the accountancy firm BDO, company investment has been flat-lining in recent months, forcing the reining in of hiring plans. BDO’s output index (a measure of orders that firms have on hand) slumped to 99.7 last month, from 100.6 in April. This is the first time since September 2013 that it has fallen below 100. Peter Hemington, a partner at BDO, says Brexit uncertainty has cast a long shadow over the economy and that growth expectations among UK companies have now fallen for the tenth month in a row.

The UK Chancellor has also warned of serious consequences for jobs in the UK, saying that a Brexit threatens at least 400,000 jobs in the service sector alone. Banks such as JP Morgan and HSBC, some of the biggest employers in the UK, have spoken of possible plans to move thousands of jobs out of the UK as a direct result of a Brexit. Many large firms have also warned of having to rethink planned investments into the UK. The secretary general of the Federation of Indian Chambers of Commerce and Industry has warned of negative consequences for the flow of Indian investment into the UK. Much of this investment comes as a direct result of the UK’s membership of the EU, which gives it frictionless access to the single market, the world’s largest economy.

For accountants and bookkeepers, the laws and standards governing the profession, increasingly based on International Accounting Standards, are not going to change much, as the world moves towards a convergence of these.

The uncertainty, potential bankruptcies and volatility generated by a Brexit may actually lead to a short-term spike in the demand for their services. But the effects of a recession, large economic and legal uncertainty, lower trade volumes and a slower growth rate of the UK economy post-Brexit are unlikely to be good for business in the long term. Brace yourselves.