LONDON — What now?
British voters’ shocking decision Thursday to exit the European Union created an eerie sense of limbo throughout the Continent and around the world over the weekend as politicians, industry executives and just plain folks digested the result and tried to figure out what impact it will have on everything from trade and travel to the global economy and tourism.
The only certainty at the moment is uncertainty — which is likely to result in a big blow to consumer confidence, not just in Europe but potentially worldwide. The concern is that the upheaval associated with the U.K.’s departure from the EU will cause consumers to pull back even more on spending, contributing further to the slowdown that has already hit retailers and fashion groups.
Following Thursday’s In/Out referendum, the U.K. needs to find a new prime minister, adjust to a devalued pound and higher prices going forward. It will need to cope with potential job losses, a likely freeze on foreign investment and questions over its future trading relationship with the EU. It also will need to cope with global businesses, especially those in the financial sector, moving a large portion of their London-based operations to the Continent in order to remain part of the EU.
Europe, meanwhile, is contemplating a future minus its second-largest economy, and a pillar of an EU that otherwise is made up of stable Germany and a bunch of other economies struggling with structural inefficiencies, yawning deficits and high unemployment.
“There is a lot of uncertainty, and that is bad for market growth,” Brian Klaas, fellow in comparative politics at the London School of Economics, told WWD. “Volatility is bad for consumer spending. All these things point to economic de-stabilization as a result of this political decision that voters made.”
Michael Jacobides, associate professor of strategy and entrepreneurship at London Business School, said he’s most concerned about what will happen in the short and medium term.
“[Gross domestic product] will take a severe hit as uncertainty forestalls investment — but also consumption — as high earners wonder about their future. The short-term impact may be worse than what many models predicted. Tax revenues, especially by those in the City [of London], will suffer, and the diversity and availability of labor will be at stake.”
GDP forecasts for the U.K. have already been cut to 1.5 from 2 percent this year, and to 0.2 percent from 2.4 percent in 2017, with Fidelity International saying recession is inevitable, and other companies predicting it could happen as early as Christmas.
Late Friday, Moody’s changed the outlook on the U.K.’s long-term issuer and debt ratings to “negative” from “stable,” arguing the referendum result — 52 percent of voters favored “Leave” with 48 percent for “Remain” — “will herald a prolonged period of uncertainty, with negative implications for the country’s medium-term growth outlook.”
Over the longer term, Moody’s added, should the U.K. not be able to secure a favorable alternative trade arrangement with the EU and other countries, its growth prospects would be “materially weaker than currently expected.”
“There will be job losses in the financial services, and in a climate of job losses, confidence is shaken and people don’t feel like spending,” said George Wallace, chief executive officer of MHE Retail, a U.K.-based consultancy that works across Europe.
The speculation is that more than 50,000 financial sector jobs could be transferred to the Continent, in particular Paris and Frankfurt, as it remains unclear what future trading and securities regulations will look like in the new U.K. Today, international banks based in London can sell and market their products freely thanks to EU “passporting” rights. Those financial service workers have been key drivers of the British economy, spending on everything from luxury goods to houses, cars to private schools for their children — especially in London.
Despite the majority of voters favoring Leave in Thursday’s referendum, there has been little jubilation among many of Britain’s businesses, and economic forecasters are struggling to see much good to come of an exit — at least in the short to medium term. They are anticipating weak consumer confidence and spending across Europe, as well as job losses and a lack of new investment in the U.K. Immigration — a hot-button issue for the Leavers who are demanding more control over foreigners entering the U.K., and more jobs for Britons — was a positive for many businesses, especially small, entrepreneurial ones and the service industry.
“Consumer industries including retail, tech, fashion and hospitality have benefited from attracting talent from Europe, and this trend has extended to manufacturers and those in supporting functions such as warehousing, logistics and supply chain industries,” said Orlando Martins, ceo and founder of Oresa Executive Search.
“Employers value this high-quality talent, whether at the ‘coal-face’ or at board level. We implore government to reassure companies and employees alike that they will ‘make safe’ in what is a trying time,” he added. This week, Britain’s business secretary Sajid Javid plans to meet with business leaders and told the BBC that his message will be “there’s no need to be panicking.”
In addition, fashion and retail businesses in continental Europe have, for the last two decades at least, relied heavily on the flood of British graduates from the nation’s schools to fill out their design staffs. The EU now could require U.K. students to get work visas, potentially cutting off that easy source of supply.
Experts agree that the fall in the pound will most certainly give a short-term boost to exports and tourist spending, while the longer-term implications are negative. Early Friday, sterling fell to a 30-year low against the dollar, but by evening it had rebounded to $1.37 after falling to a low of $1.32. It also recovered against the euro, rising to 1.23 euros from a low of 1.20 euros. Markets also took a nosedive, with the top European indexes suffering far more than the FTSE 100, which closed down 3.2 percent.
“The initial impact may be more sales coming from Europe and America into U.K. companies because all of a sudden, Britain will be a very attractive place to shop,” said Paul Thomas, senior retail consultant at Retail Remedy. “This will only be short-term, because in the long term, British companies will potentially have to pay more for the goods and services that they are buying from other countries.”
He pointed out that the fall fashion collections are shipping — or sitting in warehouses waiting to be delivered — and have been bought and paid for. Spring 2017 collections have potentially been ordered by the larger retailers, “but anything after that, depending on where the pound gets back to, will probably have a slightly higher price to the retailer to buy and that could be passed on to the consumer. If that price increase is balanced out by the weaker pound, there may not be much of an effect from the overseas customer. If they have more spending power, but actually what they are buying is slightly more expensive it may equal itself out. We don’t know yet what is going to happen.”
The same goes for exports: The weaker pound may make them more attractive to U.S. and foreign buyers, but they could actually be more expensive to make depending on how and where brands and U.K. retailers do their sourcing.
Maureen Hinton, global research director at the consultancy Verdict Retail, said while shopkeepers may have currency hedges and contract terms already in place with suppliers, “they will not be able to hold prices for long. Following the exit from the single market, there could be costly tariffs in place should the U.K. government fail to negotiate beneficial trade agreements, which will put further upward pressure on prices.
Hinton believes retailers need to encourage consumers to spend now ahead of any rises, “but that will be hard in the circumstances. The U.K. population has become well used to austerity since the recession, so retailers will not see a huge change in consumer behavior, but a further continuation of the challenges they have been facing over the past few years,” she said.
Diane Wehrle, insights director for Springboard, which measures footfall on the U.K. high street, agreed.
“Consumers are inevitably going to be more cautions in the very short term. Over the next couple of weeks they will be thinking: ‘Perhaps I should just wait and see, before buying,'” she said. “Even if we stabilize a little bit, people will still feel insecure and that is going to affect a fall in retail spend. People are likely to hold back on purchasing, particularly large ticket items.”
Wehrle believes that retailers will suffer, at least in the short term, with leftover stock going into sales, and the big international chains wondering what their future is in Britain.
“Fashion is challenged already, and then of course what are the European retailers going to do? Will they be looking long term and thinking, ‘Do we stay in the U.K.? Do we leave?’ If ultimately the exchange rate is bad and the [new] tariffs make it prohibitive financially for them to trade here they won’t.”
An indication of the uncertainty surrounding Brexit is the number of companies that wouldn’t address the U.K.’s decision and what it might mean for their businesses. Burberry, LVMH Moet Hennessy Louis Vuitton, H&M, Yoox Net-a-porter Group, Compagnie Financière Richemont, Inditex and more all declined requests for comment on the impact of the vote.
Many — including Burberry’s chairman Sir John Peace and chief creative and ceo Christopher Bailey — wanted Britain to stay in the EU for a number of reasons: Free trade and movement of workers within the single market, the power of a single trading bloc and the investment that Britain attracted as financial center and open gateway to the Continent.
Marks & Spencer would only say that it’s too early for it to be commenting in any detail. “We will be monitoring and assessing the impact on our business as the situation evolves and engaging as and when we need to,” a spokesman said.
Other British brands were relatively sanguine about the impact on business: Over the weekend, Paul Smith pointed out that his company sells in 73 countries and has offices in London, Milan, Paris, New York and Tokyo. “Personally, I would’ve been happy to stay as we were, but the world is a strange place. We’re an international business and I have total respect for Europe. Hopefully things will settle down after the initial shock and we can focus on the most important thing which is peace on earth,” Smith told WWD.
He echoed sentiments from fellow British brand Mulberry and designer Neil Barrett, both of which said before the referendum took place that life will go on no matter what, and that sales would continue with or without new — and potentially far less favorable — trade barriers.
Opening its new U.K. headquarters on Friday in St. Albans, just north of London, American footwear brand Skechers appear unfazed by the outcome of the Brexit vote. “It may be a little burdensome with the paperwork and things, but depending on what agreements are done and what they can do, I know we’ll be here and we’ll do business,” chief operating officer David Weinberg told WWD. “We’re pretty self-contained in England, as we are in Europe, so whatever the requirements are to trade within borders, we will adapt to.”
Earlier last week, the company celebrated the expansion of its European distribution center in Belgium to a million square feet. Skechers said it eventually expects to have 75 to 80 stores across Europe, including the U.K. “England is a very big market for us, we have a very big retail and wholesale presence so we don’t anticipate that business will do anything but grow,” said Weinberg.
According to the Lisbon Treaty, Britain will have two years to disengage itself from the EU, and the clock will most likely start ticking in early October once David Cameron steps down a new Conservative prime minister is named. Over the weekend, however, some European leaders began calling for the U.K. to start the exit process immediately. German Chancellor Angela Merkel was one politician urging caution — and care. She said there is no need to be “nasty in any way,” and while the disengagement process should not take forever, “I would not fight for a short time frame,” she said.
Britain will also be forced to renegotiate a raft of — hopefully favorable — new trade agreements with Europe and other countries such as the U.S. To make matters even more challenging, there are those who believe the country has lost its great negotiators, having relied on the EU to do the job over the past 40-odd years.
“Nobody knows what is going to happen in terms of how the renegotiation goes and the great question is to what degree will the European Union be vindictive in order to stop any other countries from leaving,” said Tim Knox, director at the Centre for Policy Studies, a liberal, pro-markets think tank based in London. “It is in their political interest to do so even if it is not in their economic interest.”
Knox also believes Britain no longer has top-flight negotiators. “We’ve completely lost any diplomatic expertise in negotiating trade deals, and now we need to negotiate a huge number of incredibly technical and difficult ones in the next couple of years. How to do that while not giving up that door into the EU is going to be incredibly complex — and we don’t have that skill base,” he said.
Klaas of the London School of Economics said the nature of the new trade deals will boil down to how willing Britain is to address the immigration issue: “Free movement of labor was one of the really contentious issues for Brexit, so the catch-22 for British politicians now is if they want to deliver on reducing international migration as they pledged to do, they need to basically remove themselves from the single market, and that would have a lot higher economic consequences.
“Either they are going to address migration as they promised voters, which would require more isolation, less trade and more trade barriers, or they won’t address migration and they will try to have some sort of rosy, Norwegian-style agreement that still involves freedom of movement,” he said.
Knox pointed to the automobile industry as good example of how new, unfavorable trade barriers could harm certain regions of Britain.
“The British car industry, which is completely foreign-owned, has been an extraordinary success over the last 20 years. One Nissan factory in Sunderland [a city, like most in the northeast of England, that voted Leave] manufactures more cars than the whole of Italy put together. If they are going to effectively lose their markets in Europe because there is a 10 percent tariff facing them, that could have very high profile impact on specific local communities.”
Knox added that, as a result, it is “not impossible” to envision momentum gathering for a second referendum in a couple of years, “which has happened every single other case when the country has said no in a referendum. ‘No’ does not necessarily mean ‘no,'” he said.
Indeed, there is already an official petition lodged with the British parliament for a second referendum — more than 2.5 million have signed it — and even a petition circulating for London’s new mayor Sadiq Khan to declare the city independent and apply to rejoin the EU, further adding to all of the confusion and instability facing the country.
Few, however, are surprised about talk of a second referendum. Karl Lagerfeld even brought up the topic on the sidelines of the Dior Homme show over the weekend. Of Thursday’s referendum result, he said: “I think it was a bad idea because the young and the big cities never wanted it. And the difference [between Leave and Remain] is so little. I think it is very a bad idea,” he said of the result, although he added: “Europe isn’t perfect, either.”
On Sunday, Scotland’s First Minister Nicola Sturgeon said the Scottish parliament could even veto the U.K.’s exit from the European Union. Scotland voted overwhelmingly to remain part of the EU, and there is also talk of another Scottish independence referendum as a result of the Leave victory.
Businesses large and small also argue that no matter what future deals are negotiated, the new raft of red tape will inevitably sap their money and resources. “If we want to continue trading with Europe — even though we are not part of the EU — we are going to have to fulfill their requirements in terms of standards on products — so there certainly won’t be any less red tape,” said Wehrle, insights director for Springboard.
As for the future of Europe without the U.K. that, too, remains a question mark.
On Monday, Merkel and France’s President François Hollande will meet for talks on the biggest crisis in the history of the EU, and how to move forward.
Klaas believes Europe can survive provided that other countries do not leave, although there is already talk of In/Out referendums in countries including France, the Netherlands and Denmark.
“The U.K. represents a sixth of Europe’s economy, so in American terms, we are talking about California and Florida being locked off the United States. So it is a big hit to Europe’s economy. There is this incentive for European politicians to punish Britain, but if they punish it too much, then they are going to bear the economic consequences themselves. They require a growing Britain in order to have prosperity at home, too. In other words, Germany wants Britain to succeed, but if Britain succeeds too much then other countries might decide ‘Let’s give our Brexit a shot,'” he said.
Knox said he believes Europe has bigger problems than the British exit on its hands. He pointed to the weak euro, and banking crises coming along in Italy, France and possibly Germany. “I can’t see that Brexit will have that big of an impact as there are much bigger problems in the region. There is still great resentment against German domination — we have seen that in Greece — but it is latent in many other countries in Southern and Eastern Europe.”
He also talked about the need for labor reform in France, and how the south of Europe would make sure that “any attempts to move away from the welfare model…will be strongly resisted.”
Wallace of MHE Retail believes Brexit is a net negative for Europe. “The euro zone will take this quite badly. It just started to turn the corner after the Greek crisis.” He said he fears that because of a fall in consumer spending, businesses will most likely batten down the hatches and put a hold on investments. “I am struggling to see the benefits of leaving the EU,” he said.
Although Knox is skeptical about the U.K.’s ability to negotiate successfully right now, he believes that in the long term, Britain has a great opportunity to be successful outside Europe. “Britain traditionally has a much more liberal outlook than many of the other EU states, and within 20 years, it will have a larger population than Germany. It will be free to strike great deals around the world.” He added that Brexit “creates a fantastic opportunity for building on the great strengths that Britain has.”
While manufacturing is clearly not the way forward for Britain, Knox believes the creative industries — design, media and financial services — are all U.K. strengths, which countries such as China need. “The British advantages in those kinds of areas — obviously fashion would be very much one — make it much more exciting for Britain to be independent.”