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The Economic Impact of Brexit on Germany
Dr. Alexander Börsch, Chief Economist, Deloitte Germany
Institute for Law and Finance, Goethe University Frankfurt, November 3, 2016
2 2016 Deloitte
Brexit & the German export industry
• Large trade surplus of European Union (esp. Germany), based on
• Motor vehicles
• Food
• Computers, electronic and optical products
• Machinery & Equipment
• UK sectors with surplus
• Financial services
• Insurance and pension services
• Other business services
• Telecommunications and information services
• Very close integration of UK exports into European value chains
UK is a crucial export market for Germany
Source: German Federal Statistical Office, British Office for National Statistics, Dow Jones
Germany’s export structure Structure of UK-EU trade relations
FRA
NLD
CHN
USA
GBR
ITA AUT
POL CHE
BEL
CZE
RUS
ESP
JPN SWE TUR
DNK KOR
BRA IND
IRL
MEX CAN AUS
LUX ISR ARG 0%
2%
4%
6%
8%
10%
12%
-2% 3% 8% 13%
Share
of
Germ
an T
ota
l Export
s in 2
015
CAGR of German Exports 2005-2015 (%)
11,1% 12,4%
2014 2015
YoY Export Growth to UK
3 2016 Deloitte
Brexit & the German export industry
UK will grow substantially slower – corporates hesitant to invest
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Level of Uncertainty Willingness to invest
Uncertainty/investment plans UK corporates Impact of Brexit on UK growth (change in forecasts)
Source: Deloitte CFO Surveys UK, OECD, Bank of England
2,0%
2,3%
1,0%
1,8%
2017 2018
Pre Brexit After Brexit
4 2016 Deloitte
Brexit & the German export industry
The weakness of the pound affects German exporters substantially
Source: IW Köln
Implications for German exports Development of exchange rate (Pound/Euro) since Brexit referendum
• 5% drop in pound lowers German exports by same amount
• 20% drop lowers exports by 17%
1,30
1,11
1,00
1,05
1,10
1,15
1,20
1,25
1,30
1,35
01.06.2016 01.07.2016 01.08.2016 01.09.2016 01.10.2016 01.11.2016
Decrease since 23.06.2016:
- 16.2%
5 2016 Deloitte
Brexit & the German export industry
The vulnerability of sectors differs widely
Source: Deloitte analysis based on Dow Jones data
Investment Management
Chemicals and Specialty Materials
Travel, Hospitality and Services
Consumer Products
Banking and Securities
Industrial Products and Services
Automotive
Retail, Wholesale and Distribution
Life Sciences
Technology
Real Estate
Insurance
Media
Power
Telecommunications
Health Care
0%
2%
4%
6%
8%
10%
12%
14%
16%
0% 5% 10% 15% 20% 25%
Avera
ge S
hare
of
Revenues in U
K
Average Share of Employees in UK
Exposure of German sectors to the UK
6 2016 Deloitte
Foreign Direct Investment flows
Locational competition has started
7 2016 Deloitte
Foreign direct investment flows
Currently, the UK is the major gateway to European markets for foreign investors
Top 5 investing industries, projects (2015)
253
222
143
124
117
Software andcomputer services
Financial services
Business andconsumer services
Creative and media
Automotive
1.457
792 703
0
200
400
600
800
1000
1200
1400
1600
UK Germany France
FDI inward stock, US$ bn (2015)
8 2016 Deloitte
Foreign direct investment flows
70%
21%
9%
Increase No Effect Decrease
How will Brexit affect the German market for commercial property?
Real estate experts expect higher demand for German property – and companies a re-direction of FDI flows
Source: Deloitte Expo Real survey, Deloitte/BDI survey
60%
57%
46%
38%
Increasing capital market/ exchange ratevolatility
Weakening of the European economic area inits entirety
Re-direction of foreign direct investments fromthe UK to Germany/Continental Europe
Reinforcement of Germany as a financialcenter
In the event of a Brexit how likely do you consider the following economic developments?
9 2016 Deloitte
Foreign direct investment flows
The relative attractiveness of Europe for FDI will increase – changing investment dynamics possible in the long run
Continuing comparative advantages of the UK
• Deep capital markets
• Strong cluster in financial and other services
• Large international talent pool
• Time zone
• Language
• Legal system
What might change
• No direct access to the Single market, especially for tradable services
• Higher transaction costs to do business
• Shrinking international talent pool
LSE estimate: Loss of access to single market would lower FDI flows into the UK by 22 percent
10 2016 Deloitte
EU/UK negotiations
Negotiations will at least last 2 years – but possibly much longer
French legislative election
German federal election
Dutch general election
Italian general election
European Parliament election
2018 2017 2019 UK triggers article 50
2 year Negotiation
Possible Extension
Negotiation timetable
What we know
• Free movement of people will be key issue
• Trade negotiations usually last between five and ten years
• Huge administrative challenge
• Negotiation positions not consistent yet
What we do not know
• Is extension of negotiations after two years realistic?
• How can an interim regime look like?
• Can the EU agree on a common position?
• How will the UK manage the trade-off between services trade and free movement of people?
11 2016 Deloitte
European voters have strong views about conditions for a free trade agreement
EU/UK negotiations
6
32
43
20
23
45
9
23 23
45
11
21
0
5
10
15
20
25
30
35
40
45
50
Remaining EU Members should not agree to a free
trade deal with UK
Remaining EU Members should agree to a free
trade deal with UK but only in exchange for
allowing EU citizens to live and work in UK
Remaining EU Members should agree to a free
trade deal with UK without requiring them EU
citizens the right to live and work in UK
Don´t know
UK GER FRSource: YouGov
It has been suggested that the next British government may seek a free trade deal with the European Union, but without any right for EU citizens to live and work in the United Kingdom. Which of the following reflects your view?
12 2016 Deloitte
EU EEA
(Single Market)
EFTA Free trade agreement
WTO MFN
Norway, Liechtenste
in, Iceland
Switzerland Canada Australia
Controls on EU migration/free movement
Free trade in goods
Free trade in financial and professional services
Free movement of EU nationals
UK controls on movement of EU nationals
Soft Brexit Hard Brexit
EU/UK negotiations
To facilitate trade in services, a new kind of free trade agreement would be needed
• Regulatory convergence/mutual recognition/free movement vs. regulatory autonomy and migration control
13 2016 Deloitte
• German export industry likely to suffer – from lower growth in UK, from the depreciation of the pound and costs to reorganise supply chains
• Foreign direct investment flows will not change abruptly, but benefits and incentives to locate in Continental Europe will grow
• Free movement of people and services trade will be the crucial points in the UK/EU negotiations
Key takeaways
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