Brexit blues for UK’s Automotive and Service sectors

Brexit blues for UK’s Automotive and Service sectors

The period in the run up to Brexit has been particularly harsh for the British industries and ordinary citizens. Almost every aspect of the British economy has been badly hit by it - while consumers across the board have shown signs of weakening sentiments, on the industries side some sectors have been hit worse than the others. While the finance and banking sectors are likely to be impacted the worst on account of enhanced restriction of movement of professionals across borders, retailing and consumer durables will be the first ones to recover in the post-Brexit period. The British government and the Bank of England have also adopted several monetary and targeted fiscal measures so that the ill-effects of the event are not hard felt by the British industry.

Two of the sectors of the British economy that have been impacted severely by the Pre-Brexit jitters are the United Kingdom’s Automotive and the Services sectors. Below is a deeper analysis of the two sectors and what prospects each of them holds in the post-Brexit scenario.

The United Kingdom’s Automotive Sector

The UK Automotive sector is currently in a slump with dwindling sales and stacked up inventory; most of the companies have piled up losses are in dire need of cash. Brexit has brought about an unprecedented hardship on the fortunes of this industry. While the domestic sales in the United Kingdom suffered on account of the weakening consumer confidence, overseas sales have also suffered as on of the major markets of United Kingdom’s automotive industry, that is China is also suffering from a slowdown. Brexit has also brought with it a crunch in skilled manpower. During the times when United Kingdom was part of the European Union, the British automotive industry benefited greatly from the flow of skilled manpower from other European countries who would work at discounted wage rates than that would be payable should British skilled manpower be employed. With the implementation of Brexit these skilled employees would have to return home.

The problem arising thus will be on two fronts; first, the new employees hired will have to be hired at higher costs which would push up the general input costs levels in the industry making them less competitive; second, the quantity of similarly qualified manpower of British origin available within the country is not enough to meet the requirement of the industry which in the short to mid-run will create a resource crunch in the industry. The same is also the case with raw materials and components. During the united European Union era the British automobile industry had developed deep ties with leading component and specialist material suppliers in other parts of the European union, which ensured a steady supply of cost competitive and high-quality components. Now with Brexit taking place, higher tariffs would be imposed on such goods which will not only make the input cost structure of the industry higher but in the short run there will be a resource crunch as domestic manufacturers of those components and material will not be able to scale up immediately to meet the heightened demand.

The European Union is also the largest market for British goods and higher tariffs post Brexit will be imposed on British goods entering European shores. The industry thus will be suffering from imposition of additional tariffs on two fronts, and the one on manpower cost escalation, in the short to medium term, will have a material impact on the industry. The British government taking note of the above has doled out a number of sops for the industry, the efficacy of which can only be judged as and when events unfold.

The United Kingdom’s Services Sector

The UK services sector is by far one of the hardest hit on account of Brexit. Banking, financial services, legal services, advertising industry, public relations and a host of other essential as well as non-essential, discretionary services have seen a serious slump on account of weakening business activity across the United Kingdom in the run up to the event.

The United Kingdom and especially the city of London has been a hub of global business activity and, until the advent of other major financial centers, was the financial capital of the world for a long time. The city is still home to some of the major world marketplaces ranging from trading of precious metals to insurance of ships to being home of the London Stock Exchange and also to one of the worlds largest debt markets. In fact, the services industry is the largest contributor to the British Exchequer, more than any other industry vertical. With the pre-jitters of Brexit casting its full might on the city, business activities in all these places as well as the businesses which provide support to these markets have been reeling under a tough time.

The impact, however, is not more for international business that the city attracted but for businesses on the domestic front. Most businesses either cut down on any developmental or growth expenditures envisaged till the advent of better times while others curtailed their business activities. Most affected enterprises, whose business expansions into rest of Europe were being trimmed, were busy preventing their businesses from collapsing which often involved cutting down on any non-essential expenditure.

In the post Brexit scenario however, these service businesses will see heightened business activities as business activities that had been withheld for some time will now be implemented. Most companies that had withheld acquisitions, or purchase of properties and equipment will now be undertaking these activities at double the speed to make up for the lost time and business opportunities. The credit offtake in the banking industry in particular will see a spike in the short to medium term and the legal and insurance services companies will also see heightened business activities as more consumer durables, vehicles, immovable and movable properties get transacted. The associated business activities of advertising industry and publica relations and other such businesses will see a delayed offtake as businesses will transition into a gradual pace from essential to non-essential services.

Other than the above two there are other industry verticals as well which will see mixed fortunes coming from the post Brexit business environment, which may or may not impact the fortunes of the above two industries consequentially.

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