Brexit: consumer uncertainty will depress retail sales, says Economist Intelligence Unit

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The shock which a Brexit would give to the UK economy would lead to retail figures falling by 3% in 2017, according to a new report released today by the Economist Intelligence Unit.

The study, which maps the impact of a Brexit on a number of key sectors, predicts that by 2020 nominal retail sales will be 6% lower than if the UK votes to remain in the EU.

A Brexit would also close the door to a digital single market and lead to an unemployment peak in 2018, with a projected rise of 350,000, researchers show.

GDP will fall by 6% by 202, if the UK were to Brexit, and the economy will stagnate until then, the Economist Intelligence Unit claims.

The report highlights the retail chiefs who have come out against a vote to leave. In May Sir Terry Leahy, Justin King, Marc Bolland and Sir Ian Cheshire all jointly issued a statement outlining reasons to stay.

“Tesco’s expansion under Sir Terry was so rapid that five years and two successors later the company is still struggling to find a way to manage the empire he built,” it says.

“Similarly Justin King oversaw 36 consecutive quarters of sales growth at Sainsbury’s, a feat made even more impressive given that much of it was achieved during the global financial and subsequent Eurozone crisis.

“Ironically Mr King’s final trading statement marked the first of six consecutive quarters of decline for the retailer which continues to face a tough operating environment. Sir Ian himself oversaw a share price improvement of 120% during his spell at Kingfisher. Marc Bolland’s M&S performance was slightly more chequered but history may credit him as the CEO who helped cement the retailer’s transition from clothing towards value added food.

“Either way when these four statesmen of retail say that Brexit “could be catastrophic for the consumer recovery on which so much of our economic stability depends”, businesses sit up and take notice.”

The Economist Intelligence Unit says further retail weight comes from Andy Clarke, Asda’s chief executive who used the findings of another Treasury study to add that a Brexit would create an uncertainty in pricing that cements a Remain position for the WalMart-owned retailer.

“The Remain campaign has successfully rolled out an array of respected figures in the business community to support its view that a Brexit would be economically damaging. For its part the “Leave” campaign draws on the support and combined experience of a host of politicians including former chancellors of the exchequer. But when you consider that one of these, Norman Lamont, oversaw Black Wednesday when a run on sterling forced a withdrawal from the ERM at a reported cost of £3.4bn to the UK economy, then the economic claims of the Leave campaign appear to hold a little less credibility.

“Not only do Leahy et al force the world of retail to sit up and take notice but they are also difficult to fundamentally disagree with,” the Unit states.

The report explores the economic shock that will impact retail by leaving the EU.

“It will create a period of uncertainty. Consumers will retrench and consolidate income and expenditure as they watch and wait on the outcome of negotiation. The value of sterling will fall which, at the very least, means that prices will rise in line with the cost of imports,” it says.

For retailers there will be further shocks, it claims. The supply chains and agreements that have evolved on an even playing field with partners in the EU will need to be revisited as the goal posts begin to move.

Regulatory requirements relating to safety, quality and consumer protection that are currently consistent across member states will diverge. This will force retailers to consider two sets of rules when assessing their offering between the UK and Europe.

“Rather than cutting red tape Brexit could make the situation even more complex for retailers seeking to offer comparable services across countries,” the study says.

There are also mutually beneficial schemes that opting out of the EU will bring an end to and put British retailers and suppliers at a competitive disadvantage, the Economist Intelligence Unit claims.

Opting out of the Common Agricultural Policy could affect agricultural supply chains for British farmers, it says. A Brexit will also impact on involvement in the single digital economy, which has particular ramifications for the UK’s highly developed e-commerce sector which would enjoy a comparative advantage on an even playing field.

“All of these will add to the cost and complexity of doing business which will either be passed onto consumers or borne by retailers who may have to shed jobs or fall victim themselves,” says the report.

“In mitigation to those campaigning to leave the alarmist language may be overblown. Just as frostier diplomacy is unlikely to lead us down a path to world war three, rising inflation on the back of a falling pound is unlikely to see prices skyrocketing in the way that they did during periods of hyperinflation in Zimbabwe or the Weimar Republic. Economic declines will be damaging but not cataclysmic for retail. We predict that if a referendum does result in the UK leaving the EU then there will be a short and relatively sharp retail shock, with sales volumes flattening out in 2016 before shrinking by around 3% next year. Following this there will be a muted recovery while the terms of exit are finalised before sales flatline again in 2019 when departure becomes a reality. After this retail volumes in are expected resume a more stable growth trend by 2020, but the lost years will have set retail back, with nominal sales in 2020 likely to be about 6% lower if the UK leaves when compared to the baseline scenario of remaining.”