Service Sector Hit Hard By Potential No-Brexit Scenario

  • Feb 25, 2019 GMT
  • Team Kalkine
Service Sector Hit Hard By Potential No-Brexit Scenario

According to a survey by the Confederation of British Industry, the threat of a cliff edge Brexit is driving business sentiment, especially Britain's services industry, to its gloomiest since the height of the global financial crisis in 2009. Britain's biggest business group said that uncertainty surrounding the Brexit, which is now just a few weeks away, has resulted in the most significant drop in confidence among business and professional services in over a decade. This further adds to the evidence that the economy is getting adversely affected by the weight of increasing Brexit confusion and suggest impending exit is already denting business growth in services.

The Confederation of British Industry, which conducted the survey from among its 190,000 members, said business and professional services firms – which includes many of the UK's accountancy, legal and marketing firms - had seen the biggest fall in profits in six years. Their sentiment was also weakening at the fastest pace in a decade. Consumer-focused companies, which have grown on the back of rising household incomes and employment and includes hotels, restaurants and leisure firms, also reported decreasing profits for the fourth quarter in a row. Moreover, this sector was the most negative about the outlook for business expansion since 2009, and the volume of trade dipped slightly for the fifth consecutive month. Apart from Brexit uncertainty, rising costs and sluggish volumes of business have contributed to a drop in the profitability. Analysts predict that profitability will decline at a similar speed in both the sub-sectors over the coming three months.

The current system allows service companies in the country to establish and offer services in any other EU country as part of one market. The removal barriers within the EU is particularly advantageous for small businesses, who can cater to the broader European market by setting up offices in local regions. Without a deal which addresses service sector's issue, numerous regulatory measures will be restored, leading to additional costs on UK firms. Any no-deal Brexit is expected to hit Britain much harder than other major European economies.

The service sector is immensely imperative for growth and sustainability in London and the broader UK economy. The UK's service sector, especially financial services, has a substantial competitive advantage over the European Union. It generates a trade surplus of roughly £21 billion with the EU and £30 billion with the world. The sector provides employment to more than a million individuals, with around two-thirds outside London.

Leaving the bloc without a deal in place will create considerable issues for the UK's world-leading services firms. This may lead to moving of jobs and investment from the UK to EU, which many companies have either already planned or executed. According to the latest polls, the service sector reported the weakest employment growth in eight years. Lower tax receipts from firms and jobs moving overseas would result in less funding available with the government to tackle a myriad of challenges. Post-Brexit, the companies will not be able to enjoy high-skilled workers and simple systems of intra-company transfers within the EU.

The prospects of professional and business services companies are firmly in relation to the growth of the whole economy. Any downturn in the service sector does not augur well for the economic growth of the country. The political establishment will have to realise that in a no-deal scenario, the service sector will experience a long-term decline in the capital's competitiveness which can snowball into a recession in the whole country.

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