05 October 2017

VoxEU: New survey evidence on the impact of Brexit on UK firms

While most firms expect a negative impact of Brexit on sales, investment and costs, only larger firms and those that are more exposed to international markets are likely to think that they might move part of their business abroad, according to evidence gathered in the Decision Maker Panel survey.

[...]four results about the impact of Brexit

1. Brexit is a major source of uncertainty for firms.

In August 2016 in response to the question: ‘How much has the result of the EU-referendum impacted the level of uncertainty affecting your business?’ more than one third of CEOs and CFOs cited Brexit as at least one of the top sources of uncertainty. Indeed, back then 10% said that Brexit had been the most important factor and 25% said it had been one of the top two or three sources of uncertainty (Figure 2). Successive waves of this question have shown that firms continue to place Brexit high on the list of sources of uncertainty. In fact, the share of firms placing Brexit in the top drivers of uncertainty has risen from 35% in August 2016 to almost 40% in August 2017, while the share of companies considering Brexit not important almost halved in the same period, from 23% to 12%.

2. Most firms expect a negative impact of Brexit on sales, investment and costs.

Companies believe it is more likely than not that Brexit will reduce their sales and investment, and increase their exports, unit costs, labour costs and financing costs. Figure 3 shows the net probability that companies attach to Brexit having a positive rather than a negative effect on each variable. According to our survey the average probability attached to Brexit increasing sales by 2020 was 20%, while the average probability of a negative impact was 42%. The net effects shown in the chart below is a net balance of -22% for the effect of Brexit on sales by 2020. It means that companies place more weight on Brexit reducing sales than on increasing them. There was a net negative expected effect on investment, and a positive effect pushing up unit costs, labour costs and financing costs.

When we break these responses down by firm size, we find larger firms are more pessimistic about the impact of Brexit than smaller firms. These firms are often more exposed to international markets than smaller firms, although many small firms form part of a supply chain for larger firms.

3. The majority of firms are not considering moving any operations abroad, but a few larger firms are.

Most firms see no possibility of shifting the location of their operations abroad – many have no presence abroad and export little or nothing. Firms accounting for 80% of employment attached zero probability to moving any operations. Among larger firms and exporters, however, the story is different. Larger firms and those that are more exposed to international markets were more likely to think that they might move part of their business abroad compared to firms that are smaller or domestically focused. By sector, firms in manufacturing were most likely to say there was a chance of moving. Across all respondents, the average (employment-weighted) probability of moving some operations abroad was 7%, with companies who accounted for 7% of employment thinking that it was more likely than not that they would move some operations abroad (Table 1). These probabilities are still quite small at this stage, but not negligible.

Companies that reported higher probabilities of moving abroad were more likely to expect to move within the next two years, before the UK has actually left the EU, whereas those reporting lower probabilities were less likely to plan on moving within two years.

4. Exit risks lowering aggregate productivity growth.

The higher productivity parts of the country voted to remain in the EU (Figure 4). After the vote in the referendum they became less optimistic about future prospects for the economy (Figure 5), and have likely lowered investment and employment growth.

In contrast, the parts of the country that were in favour of Brexit had lower productivity (Figure 4), and have become more positive about future prospects since the vote (Figure 5), potentially raising investment and employment growth. If this leads to a reallocation of investment and employment from higher to lower productivity parts of the country it could reduce UK productivity growth.

Full results

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