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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