How will Brexit affect manufacturing?
Although I’m a fan of science fiction, I have to laugh at utopian predictions of global—even universal—unity and harmony. Clearly, these authors don’t read the news. In 2015, no less than 55 armed conflicts raged worldwide. Four of them produced more than 10,000 deaths; 10 caused 1,000 to 10,000 deaths; and 28 totaled 100 to 999 deaths. Sixteen years into the second millennium, the world is more divided along religious, ethnic, tribal and political lines than ever.
Perhaps the latest evidence is Britain’s referendum vote in June to leave the European Union. Supporters of the so-called Brexit argue that being a member of the EU undermined British national sovereignty. They feel that leaving the EU will give the U.K. better control over immigration; save billions of pounds in EU membership fees; allow the U.K. to make its own trade deals; and free the U.K. from EU regulations and bureaucracy.
Those who wanted to remain in the EU argued that leaving will risk the U.K.’s prosperity; diminish its influence over world affairs; jeopardize national security; and result in trade barriers between the U.K. and the EU.
Who’s right? Time will tell. From the standpoint of global manufacturing, the Brexit could have negative consequences, at least in the short term.
For example, IHS Automotive predicts that the U.K.’s exit from the EU could cost automakers 2.8 million light-vehicle sales worldwide through 2018. After the Brexit vote, the market research firm lowered its global sales forecast to 89.82 million vehicles in 2016 (-200,000), 91.06 million in 2017 (-1.25 million) and 93.12 million in 2018 (-1.38 million).
IHS analysts lowered their forecast because they expect the British pound to depreciate compared to other currencies, especially the euro. (At press time, £1 was worth €1.33, down from €1.55 a year ago and €1.86 a decade ago.)
According to IHS, the U.K.’s exit from the EU could also slow economic development in the eurozone. Prior to the referendum, IHS predicted an average GDP growth rate in the eurozone of 1.7 percent in 2016, 1.8 percent for 2017 and 1.6 percent for 2018. Now, IHS forecasts growth at 1.4 percent in 2016, 0.9 percent in 2017 and 1.4 percent in 2018.
How Brexit will affect U.S. manufacturers is uncertain. In terms of total trade, the EU is our largest trading partner, and it’s second only to Canada as a market for U.S. exports. Indeed, U.S. companies sold $56.6 billion in goods to the U.K. alone last year, making it the fifth largest market for U.S. exports. (Germany is sixth, at $49.9 billion.)
“The Brexit vote has added yet another element of uncertainty into the marketplace, which could further undermine growth within Europe and potentially globally,” says Chad Moutray, chief economist at National Association of Manufacturers. “If you are a manufacturer making hiring and capital spending plans, there is a lot to be worried about globally.”
We shall see. Brexit or not, U.S. manufacturers need a healthy European market.