A few days after the UK voted to leave the European Union, the British pound fell to a 30-year low, resulting in rising prices on luxury goods. Global financial markets also took a nosedive, and the IMF stated that Brexit would have potentially negative implications for the economy. The bank also predicted the UK economy would grow 0.2 percentage points slower in 2016, caused by a reduction in consumer confidence, and a reticence from British businesses to jump into new investments until new trade rules are cemented. But some analysts are cautioning against sounding the alarm bells, and say that the market is simply reflecting a normal post-vote temporary decline; and major banks do not forecast a recession.
The FTSE 350 Index of General Retailers fell by 12% before a slight recovery, and is now down by around 9%. There’s little question the retail industry post-Brexit will have to be more agile, digital, capital-intensive and more responsive to change than ever before. Aside from sales numbers, there’s the human cost to consider. The retail sector is an important part of Britain’s economy, responsible for 11% of output and 4.5 million jobs in shops, ecommerce and physical distribution. One fear is the status of EU citizens currently employed by the industry that are living in the UK on work visas. With the nearly 2 million EU citizens employed in the UK’s retail sector, concerns have risen about changes to their visa requirements and whether they will be allowed to remain in the country sponsored by their employers.
Fallout of the referendum is showing mixed results thus far, and it’s far too soon to predict long-term effects. British department store chain John Lewis reported lower than normal sales in the week following the referendum, but regardless of sales declines across industry, major investment banks like Goldman Sachs said they would work to keep London the epicenter of global finance and commerce. Especially since it could take at least two years for the UK to extricate itself from EU structures and regulations.
Two of the biggest international retailers that could be affected from the Brexit market fluctuation are H&M and TJX Co, the parent company of TJ Maxx, Marshall’s and HomeGoods. H&M’s share prices fell 10% in the days following the vote. Michael Kors, Tiffany and Ralph Lauren were also hit with declining sales.
According to Lesley Batchelor at the Institute of Export, the Brexit vote will deliver changes in rules and regulations for online retailers. However, UK-based online retailers will be able to sell a lot more goods abroad priced in sterling, as their prices are much cheaper now compared to overseas rivals. “The negative effect of Brexit in terms of currency fluctuations is very real,” says designer Thomas Cridland, owner of sustainable fashion brand, Tom Cridland. On the flip side, some say the pound weakening has made expensive products more attractive to international buyers, especially from Asia, increasing projected sales potential.
The EU is widely considered one of the most successful partnerships in recent history, therefore it’s not surprising that there would be an intense reaction to the idea of destabilization that comes with the separation from one of its strongest countries. Surveys of manufacturers and services firms in recent weeks suggested the economy was shrinking at the fastest pace since 2009.
Regardless, many analysts feel the hand-wringing over the EU referendum is overblown. The UK vote to leave is just one in a series of previous decisions that have blocked progressive policies that would allow other member countries greater economic flexibility. If anything, their vote to leave has freed up Germany, France and Spain to move forward on economic opportunities that would unify other participating countries. So while the number of people visiting British retail shops fell 3.4% in the days following the referendum, CBI’s chief economist Rain Newton-Smith says we should be cautious about reading too much into the vote’s economic outcome too soon.