Not many observers expected the Leave campaign to prevail in the June 2016 referendum on the UK’s membership of the EU. Fewer still imagined the political chaos that would unfold afterwards. Almost three years into the Brexit process, government and parliament are still in disarray regarding the best way forward, continuously swinging between the ‘soft’ Brexit hoped for by many MPs, and a ‘hard Brexit’ backed by a group united under the umbrella of the European Research Group. With prime minister Theresa May losing leverage in London, as well as in Brussels, the country is now flirting with a no-deal Brexit.
“The UK is losing its cool,” says Filip Rambousek, Europe and central Asian political analyst at risk consultancy Verisk Maplecroft.
The business end
Businesses have witnessed the Brexit impasse with an increasing sense of powerlessness. In fact, the political debate has become so polarised that any stakeholder not directly involved has been marginalised.
“F*** business,” the UK press reported Boris Johnson as saying at an official reception during his last days as UK foreign secretary in June 2018.
Companies across the board adjusted accordingly. Some have relocated personnel, others shut down entire offices. Financial hubs across the English Channel or the Irish Sea have been unequivocal in their efforts to lure businesses away from London. And these efforts have paid off.
If London’s shoulders are broad enough to bear Brexit, that may not be the case for manufacturing and services centres across the country, whose local economies are more exposed to the decisions of a smaller pool of investors. In the current climate, the divide between the bursting capital and the rest of the country is only widening.
The echo of the unfolding Brexit talks gives way to the noise of construction works along the few kilometres that run between the Houses of Parliament and Kings Cross. Once a forgotten industrial area built around one of the city’s main railway hubs, Kings Cross is going through a high-profile regeneration scheme that has received the backing of major tech powerhouses, despite the Brexit uncertainties.
Google decided to invest about £1bn ($1.3bn) in the design and development of its new 93,000-square-metre London headquarters in Kings Cross. Facebook also pre-let major office space in the area for its new London headquarters, as did Samsung for a new showroom. A few kilometres away, on the south bank of the Thames, a long-gestating £9bn regeneration project of the iconic Battersea Power Station by Malaysian investors will deliver a new London headquarters for Apple.
“The UK is one of the best places in the world to be a technology company and we’re investing here for the long term,” Steve Hatch, Facebook managing director for northern Europe, said in a statement in July.
It is not just tech investors betting on London. German discount retailer Lidl announced a major commercial-residential redevelopment worth about $750m in Richmond, in the west of the city, to cater to the ever-growing local market. The Canada Pension Plan Investment Board, one of the world’s largest pension funds and traditionally a conservative, long-term investor, formed a £1.5bn partnership with Australian developer Landlease to carry out the next phase of the regeneration of the Heygate estate in Elephant and Castle, south-east London. Testament to the city’s resilience to external challenges, all these projects were announced after the Brexit referendum.
Overall, foreign investors announced new greenfield investment in London worth $14.6bn in the seven quarters following the invocation of Article 50, between March 2017 to December 2018. This represents a 41% increase from the previous seven quarters, according to greenfield investment monitor fDi Markets. The capital city thus bucked a trend that saw announced FDI in the country’s remaining 95 administrative regions tracked by fDi Markets fall to $35.2bn in the seven quarters up to December 2018, a 34% decrease from the previous seven quarters.
Brexit has taken its toll on London’s FDI appeal, however. A growing number of financial institutions have had to relocate staff and functions to hedge the risk of losing passporting rights and thus access to the EU capital markets.
A survey by Reuters of more than 120 banks and insurers, both from the UK and overseas, suggested 10,000 jobs could be relocated as a result of Brexit, which may prove to be more of an image setback rather than a real blow to the city’s economy. Those 10,000 jobs represent less than 3% of London’s financial workforce, according to figures from lobby group TheCityUK, and a mere 0.5% of total office stock in central London.
“[It’s] a manageable figure for the market to absorb,” James Roberts, chief economist at real estate company Knight Frank, said in a report in mid-2018.
If their impact on London’s ecosystem is limited, those relocations have been a boon for financial hubs such as Dublin, Paris, Frankfurt and Amsterdam, which have benefited from the relocation plans of the likes of JPMorgan, Merrill Lynch, Morgan Stanley, Citigroup and Nomura. These four cities have received record high inflows of FDI into their financial industries since the invocation of Article 50 in March 2017, fDi Markets figures show.
China fills the gap?
With the financial sector in uncertain territory, it is the technology, media and telecoms industry that is now in the driving seat of London’s economy, despite a few notable defections: Japan’s Sony and Panasonic have moved their European headquarters to Amsterdam.
Brexit may well end up reducing their access to European talent as “it can damage the UK’s brand, it may signal that the country is turning inward”, Verisk Maplecroft’s Mr Rambousek points out. However, non-EU talent is already filling the gap. First-year students in UK universities from China alone have trebled in the past 10 years to reach 76,425 enrolments in 2017-18, more than the combined number of students from the 27 members of the EU, according to the UK’s Higher Education Statistics Agency.
Overall, EU students made up only one-third of non-UK first-year students in 2017-18. Besides, many UK graduates gravitate towards London even when they do not study in the city; every year, one-third of the country's 100,000 or so recent graduates head to the capital from the regions.
The picture is different outside the capital, particularly in regions built on the UK’s export-oriented manufacturing and low-added-value services sectors.
The UK’s once resurgent industrial sector is now facing a grim future. Japanese car producer Nissan scrapped plans to produce a new model in its plant in Sunderland, the largest car manufacturing plant in the country, because of tough business conditions in the car market, but also because “the continued uncertainty around the UK’s future relationship with the EU is not helping companies like ours to plan for the future”, a company note stated on February 3. That may be just the tip of the iceberg.
Investment into the UK automotive sector, which exports 52.6% of its production to the EU, almost halved to £588.6m in 2018 from the previous year, according to figures from the Society of Motor Manufacturers and Traders. Major producers, from JLR to Honda and Ford, are in wait-and-see mode. Other major industrial players, such as aerospace giant Airbus in Bristol, have been warning against the impact of a hard Brexit for months. Overall, FDI into the UK’s manufacturing sector has fallen to its lowest level since 2003, according to fDi Markets figures.
Meanwhile, investment into low-value-added services, typically located away from London for cost reasons, is also plummeting. FDI into UK customer contact centres fell to historic lows in 2018 with only six such projects announced, from a peak of 26 in 2012, fDi Markets figures show.
“Investors in the regions are putting investment decision on hold, or cancelling them altogether,” says Stuart McIntyre, senior lecturer in economics at the University of Strathclyde. “Good employment figures suggest that too. Companies are meeting growing orders – the economy is still growing after all – by adding more people. They are shifting away from capital investment to labour investment. Should a solution be found, they may switch back to capital.”
Diverging investment levels translate to diverging growth rates. After adjusting for inflation, London’s economy has grown by about 4.9% since the June 2016 referendum, compared with growth of about 1.9% in the north-east of England and 2.9% in the north-west and a national average of 3.3%, according to figures from the Economic Statistics Centre of Excellence.
A governance challenge
Although the national government is focusing on Brexit talks, the window for the regions to come up with local solutions to shore up investment and economic activity is still short.
“In the past couple of years, different areas of government have stopped as everything has been subordinated to the outcome of the Brexit negotiations,” says Mr McIntyre. “Everything has been put on pause, including the resources for a sub-national industrial strategy.”
Brexit has halted the process of decentralising powers from Westminster to local authorities across England. (Scotland, Wales and Northern Ireland already have a wide set of devolved powers.) Major local authorities in places such as Manchester and Birmingham are now trying to restore momentum to this process.
“Brexit was about people voting for powers to return from Europe to the UK,” says Ian Ward, leader of Birmingham City Council. “People voted for taking back control at a national level, but also taking back control from London at a regional level. They expressed a desire for greater devolution to local regions, therefore the national government should look to give further powers and budget to local regions.”
Local authorities, and their investment promotion arms, are already taking steps to adjust to a post-Brexit UK. The West Midlands Combined Authority unveiled a regional industrial strategy in November 2018 to propel the region after Brexit. Cities such as Manchester and Liverpool are strengthening ties with Asian partners. Smaller authorities such as Cornwall Council are opening offices in Brussels so as not to lose their grip on their biggest market as the country leaves the EU.
Local dynamism is further compelled by the impasse in Whitehall. Trade secretary Liam Fox was given the keys to design a comeback of 'global Britannia'. So far, he has closed continuity trade deals with a just few non-EU partners, and received little political commitment from major overseas partners for comprehensive post-Brexit free-trade deals. In fact, countries such as the US and China have formally objected to the schedule on tariffs Mr Fox submitted to the World Trade Organization (WTO) should the country fall back on WTO tariffs. Even if a Brexit agreement finally finds its way through parliament, a future trade deal with the EU remains a remote likelihood.
“Brexit shows that the UK wants to come out of a regulatory alignment with the EU, and this is going to make negotiations for a trade deal very difficult,” says trade negotiator and Brexit critic Jason Hunter.
The UK and the EU have until March 29 to define the terms of their divorce. Uncharted waters await both parties beyond that deadline. “Great Britain has lost an Empire and has not yet found a role,” former US secretary of state Dean Acheson famously said in 1962. That new role initially seemed to be within the EU, once the country voted to join the Common Market in 1975. This did not work out, and Westminster is once again trying to address the challenge embodied in Mr Acheson’s words. Stakeholders across the board, from civil society to business, are holding their breath. Now the government and parliament are under pressure to come together and deliver the deal that will define the role of the country in the global trade arena for the years to come.