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Fury, Panic Over Brexit Subsides As Calmer Views Prevail

Fury, Panic Over Brexit Subsides As Calmer Views Prevail.

“The E.U should not treat Britain as an escapee from prison, but as a potential compatriot”

Initial handwringing about the sky falling on the automotive industry after Britain’s shocking decision (Brexit) to leave the European Union (E.U.) has been replaced by a less emotional determination to solve whatever problems may be thrown up.

Truth be told, nobody yet has any idea just how the issue will play out. One thing is measurable and certain; the value of sterling against the dollar has plunged by around 13 per cent since June 24, the day the Brexit result stunned political and business elites in Europe.

This has prompted car makers like France’s PSA Group, which imports all the cars it sells in Britain, to raise prices between 2 and 3 per cent. Other manufacturers which don’t produce vehicles in Britain are likely to follow suit.

Ford Motor Co has already said how the fall in sterling cost it $60 million in the second quarter, expected to grow to about $200 million for the full year and $400 to 500 million next year. It must now be regretting closing down British vehicle output and moving it to mainland Europe.

General Motors, which sells Opels in mainland Europe and the same vehicles badged as Vauxhalls in Britain, has said Brexit will cost it $400 million and will hurt its campaign to move into the black. GM has two big factories in Britain – Ellesmere Port near Liverpool which makes Astra sedans, and a plant north of London making vans. Industry analyst Inovev said GM is considering closing both these plants by 2020. It gave no reason beyond saying it is a consequence of Brexit, or explain why GM would want to give up the chance of manufacturing with the big advantage of a sharply lower exchange rate.

Pure speculation
GM said this was pure speculation and declined to comment.

But the great imponderable remains just what kind of trade deal will Britain be able to negotiate with the E.U.

There are two extreme possibilities – a full failure of negotiations ending with a default to World Trade Organisation tariffs on imports and exports, or a new free trade agreement which would mean life carried on pretty much as now.

Before Britain can negotiate exit from the E.U. it has to invoke Article 50 of the Lisbon Treaty. Under this clause, negotiations have to be completed within 2 years. The British government has yet to say exactly when this process will start. Informed opinion assumes it will probably be early in 2017.

According to BMI Research, Brexit will bring negatives for both the British and E.U. automotive industries, but the harsh talk which followed the Brexit vote is likely to be tempered by the realization of mutual self-interest. As former U.S. Secretary of State Henry Kissinger put it in a recent Wall Street Journal article.

 “The E.U should not treat Britain as an escapee from prison, but as a potential compatriot,” Kissinger said.

The harsh rhetoric mainly came from career bureaucrats in the E.U. governing body, the Commission, who see their long-term future as leaders of an ever closer E.U. being undermined by Brexit. Elected national politicians like Germany’s Chancellor Angela Merkel are likely to have a different priority; retaining Britain as a reliable market for its car industry and pleasing voters.

Single biggest destination
About a fifth of all cars produced in Germany last year, or around 820,000 vehicles, were exported to the UK, making it the single biggest destination by volume, bigger than the U.S. or China.

“We expect this harsh rhetoric from member states, notably Germany and France, to soften given the reliance of their economies on U.K. demand,” BMI Research said in a report.

As for the economic implications for Britain of Brexit, BMI Research said it expects a technical recession in the second half of 2016.

“There is a silver lining for the UK economy amid the declining confidence, and that is the sharp depreciation of sterling following the vote…… will provide a boon for exporters, many of which will have feared a decline in trade in the aftermath of a Brexit vote. There are also signs that major emerging and developed economies outside of the E.U. are seeking to create new trade deals with the U.K., a prospect that will become much easier once the U.K. leaves the E.U.,” BMI Research said.   

Members of the E.U. are forbidden from negotiating individual trade deals with other countries. This must be done through the E.U. and must be agreed by all 27 members.

Nevertheless, BMI Research cut its real GDP growth forecast for 2016 and 2017 to 1.4 per cent and 0.2 per cent, from 1.8 and 2.2 per cent.

According to IHS Automotive this will have a minor initial impact on British car sales, gaining about 1 per cent in 2016, but with steep declines in 2017 and 2018.

“Major economic and political uncertainty will persist for some time, weighing down on business and household confidence and behaviour and thereby dampening investment, employment and consumer spending,” IHS Automotive said in a report.

Forecasts lowered
IHS Automotive lowered its GDP growth forecasts for Britain to 1.6 per cent from 1.9 per cent for 2016, to 0.2 per cent in 2017 from 2.4 per cent and to 1.3 per cent from 2.3 per cent for 2018.

This will force car sales down 9.2 per cent in 2017 to 2.42 million, which will slide a bit again in 2018 to around 2.37 million.

LMC Automotive wasn’t quite so gloomy, cutting its forecast for British car sales to growth of 5.2 per cent in 2016 after previously expecting a 5.5 per cent gain.

“We continue to assume economic headwinds will hit the U.K. car market over the remainder of this year, and beyond, “LMC Automotive said.

Not great, but it looks as though the sky will remain in place.

   

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