A seismic shock rippled through the fashion industry last week after the UK voted to leave the European Union. Some predicted an apocalypse for British business while others hailed a brave new world of opportunity, free from the EU’s shackles. But, as the dust begins to settle, how much do we now know about our future?
1. If you Brexit, you pay for it
Financial experts predicted chaos if we voted to leave the EU. This week the UK lost its AAA credit rating from trusted financial barometer Standard & Poor. It tumbled two places, missing out the AA+ rating, straight to AA. This means it will cost more for the UK to borrow money, destabilising the economy and making foreign investment, including overseas buyers looking to acquire British fashion retailers, less likely.
On a brighter note, sterling, the FTSE100 and FTSE250 markets have recovered somewhat after plummeting last week. The FTSE100 has recovered pretty much all of the losses, with the FTSE250 still about 6% down, but continuing to bounce back.
Consumer confidence has fallen to its lowest point since May 2013, according to a YouGov/CEBR Consumer Confidence Index, released yesterday (June 30). Head of YouGov Stephen Harmston warned: “It is clear that Brexit could lead to a marked slowdown in the economy over the coming months.”
He continued: “Recession certainly cannot be ruled out at this point. Our latest data show just how spooked households are by recent developments. In the coming months this is likely to filter through into a much weaker environment for retail sales and household spending – particularly on big ticket items.”
2. When will I see EU again?
We haven’t left the EU yet and will not for at least two years. Leaving means triggering article 50 of the Lisbon Treaty, meaning official negotiations regarding our future relationship with the EU can begin. At first, it was thought this would happen immediately after the referendum. But prime minister David Cameron refused to pull the pin and now it looks likely this won’t happen at least until after the Conservative Party leadership election in September.
This is significant for fashion retailers for a number of reasons:
- The longer this goes on the longer the period of uncertainty is for business, meaning a return to stability, along with investor and consumer confidence, may be further away
- We won’t know what terms will be agreed outside of the EU, including those on free trade and tariffs, until this has been resolved
- Some are even saying there is a nuclear option of never triggering it and ignoring the referendum result, which will be music to the ears of Brexit-wary retailers. However, for now this seems far-fetched.
Business secretary Sajid Javid has set up an inter-ministerial business engagement group to try to soothe business owners’ fears during these tumultuous times. Announcing the move, he said: “Now more than ever, businesses need certainty so it’s vital that the government maintains an open and continuous dialogue.
“We must work together to make sure the world knows that the UK is still open for business and remains an attractive place with which to trade and invest.
“Working with ministers across government, I will make sure businesses have the information they need and work with them to identify opportunities as they open up.”
3. Not so free movement
Freedom of movement has been a big post-Brexit battleground this week. With so many fashion retailers relying on workers from the EU, losing free movement would be a massive blow to the industry.
Influential pro-Brexit Conservative MEP Daniel Hannan first breached the subject on Newsnight on Monday. In a move that many felt was at odds with his message during the campaign, he came out in favour of free movement: “The idea of staying within a common market, but outside the political integration, I think that is feasible yes. It means free movement of labour, it doesn’t mean EU citizenship with all the acquired rights.”
The frontrunners in the Conservative leadership race seem less keen on the idea. Favourite Theresa May has even gone as far as to question the rights of EU nationals already working here to stay when we finally leave. She said their future in the UK “depends on negotiations” with the EU.
This may be no more than a negotiating tool , but the tone is worrying for retailers still looking to Europe for skilled workers.
4. If we’re going down…
It’s becoming increasingly clear that it’s not just here in the UK that the impact of Brexit will be felt. At Berlin trade show Panorama this week, the fallout was a big topic of conversation for exhibitors and delegates from across Europe.
German retailer Marc Cain’s head of distribution Thomas Herter told Drapers: “We couldn’t believe the result of Brexit. We were very shocked. Although it is early to say, it is clear it will have a negative impact on a lot of aspects of the industry. We’ve had to increase our prices because of the exchange rate and it will almost certainly have an effect on our sales.”
The EU’s Standard & Poor credit rating has also been downgrade from AAA to AA+, meaning the EU may share some of the UK’s upcoming financial woes.
5. It’s not all bad news
Okay, so it’s almost all bad news. But there are some small breaks in the cloud. A weak currency is good for exporters, and some are already looking to take advantage of this. Burberry has received a boost this week as American bank Merrill Lynch upgraded it from a ‘neutral’ to ‘buy’ asset in its most recent Broker Ratings Summary.
An official statement from the bank read: “GBP weakness has created a significant tailwind, which we think is yet to be reflected in consensus earnings or its valuation.”
SVM Asset Management MD Colin McLean also believes those selling overseas may benefit in the long term from Brexit: “The effective devaluation will give a much needed boost to exports, and for the stock market will raise the value of businesses with overseas earnings – a large component of the FTSE 100,” he said.
“The experience of other countries with devaluations, or even of the UK in 2009 and after ERM exit [when the British Conservative government was forced to withdraw the pound from the European Exchange Rate Mechanism], is not always to see stock market falls.”