As we approach the Brexit end game, increasingly minds are focusing on what the optimal outcome is. For the recruitment industry, a Brexit that enables job creation and investment is critical for the continued buoyancy of the sector, therefore assuming the UK does leave the EU, it is worth reflecting on the options and what they may mean for recruiters.
The Bank of England recently published their withdrawal analysis, where they provided models based on potential outcomes where their findings were as follows:
- Out of the options currently on the table, the deal proposed by Theresa May will be the least disruptive for the economy. While there will be an impact to both overall GDP and GDP per capita, potentially this would be relatively small if managed properly. It is worth noting that with the TM deal, Financial Services equivalence would then be a central plank of trade talks with the EU. In a scenario where this goes ahead, this would also mean that business would be able to start planning for the future with certainty about what Brexit means. A lot of pent up investment would be released which potentially means that 2019 could be a very good year for jobs in the UK. There is competing analysis on salaries, equally skill shortages combined with a benign economic climate suggest that wages should increase in certain areas, as businesses compete from a smaller talent pool.
- On the other extreme, the ‘clean’ exit proposed by leading Conservatives has the potential to be hugely disruptive, with a GDP hit of up to 8%. The fact that so many industries are tied into the wider European economy and suddenly will have restrictive barriers preventing them from trade, will lead to increases in unemployment, the only question is by how much. The forecast on the increase varies, but this could lead to unemployment increasing by over 1 million. Similarly, the impact on capital flows would lead to sterling depreciating further, where as a result inflation would shoot up for all imported goods, where interest rates would need to rise to compensate. Carney stated the impact of a ‘clean Brexit’ would be far greater than the 2008 crisis and when one analyses the economics it becomes clear why. There would be the potential for stagflation to re-occur in the UK once again, for the first time since the 1970’s. The last time the UK had stagflation, it took an IMF bailout to rescue the UK economy. That is the scale of what a clean Brexit could mean. For this reason, I would argue anyone who seriously wants a ‘clean brexit’ is either economically illiterate or too wealthy to care about what it means for the UK.
- There is also however a third Brexit that has not had much serious discussion, EFTA membership. The advantage of EFTA membership is that it would ensure the UK retains its membership of the single market, meaning that for services sectors currently not covered by the proposed deal, they benefit straight away. For context, the UK has a trade surplus on services but a trade deficit on goods. In a scenario where the UK has no restrictions on the trade of goods but can not freely export services, what this would mean is the UK would run a larger trade deficit. This then would impact UK interest rates, as the Government would need to borrow more money in order to cover the shortfall. Also sectors which specialise in exporting services would inevitably re-patriate jobs away from the UK. While the total amount of jobs at stake is not statistically alarming, it would result in some of the best paid jobs in London being shifted away. Also with EFTA membership, free movement would still apply meaning recruiters would still have access to a European talent pool for candidates.
EFTA membership has already been ruled out by Theresa May, because of the freedom of movement provisions. However when she says people voted to end freedom of movement, that is her interpretation, not a fact. The only thing people voted for was to leave the EU. EFTA membership keeps the economic benefits of EU membership whilst honouring the democratic result of the referendum.
Another factor worth considering is the impact of the industrial reforms by Thatcher. As a consequence of de-industrialising and closing down British industry en-masse, the UK ended up with huge swathes of structural unemployment across the midlands, north and Wales. The way the UK Government sought to compensate was through attracting direct foreign investment. The way the UK Government sought to do this was through creating the EU single market. Remember it was a British initiative, designed so that Non EU corporations could invest into the UK as a base for European operations. To that end it was incredibly successful, where there are now more non EU corporations with their EU HQ in the UK that in the rest of the EU put together. The UK leaving the single market puts this at risk, hence the slow bleed of jobs and investment over time that Carney is referencing. Conversely, these businesses being based in the UK results in higher employment and corporate taxes which more than compensate for the fees paid into the EU.
However, there is no perfect outcome to the current set of circumstances. The EU itself is now changing into something it was not the last time the UK had a referendum on this subject. The EEA was a trading block only. The UK has only ever had one referendum on its EU membership and that was declined. We can argue that maybe there should be another, equally perhaps the best outcome would be to have all the economic benefits of EU membership through EFTA, whilst making our politicians impotent and unable to do any further damage to the UK economy. Anyone remember Cameron stating the Conservatives stood for strong and stable government? Good joke that one. Maybe now the joke should be on the other foot.