Where are we now?

Important Information

We want to make investing with us simple and straightforward for all of our clients.

Please select your investor type from the options below.

Alternatively you can register or log in to an existing account.

Please note that by making your selection here you are agreeing to the Woodford Investment Management Ltd Privacy Statement and to our Terms and Conditions.

A report by Capital Economics for Woodford Investment ManagementNovember 2017

The performance of the economy overall after Brexit will be determined by the Brexit settlement (whether there will be a deal) and also by what happens afterwards (the extent of policy activism). Vigorous policy activism is inevitable in the case of ‘no deal’. Thus, three macroeconomic scenarios are plausible:

  1. ‘No deal’
  2. ‘Compromise deal’
  3. ‘Deal with ambitious policies’

The form of Brexit

We see the most likely form and timetable for Brexit to be the ‘compromise deal’ scenario, namely:

  • Negotiations continue for the next year and reach a conclusion in October / November 2018
  • A deal is reached covering withdrawal issues (e.g. citizens’ rights, the bill), transitional arrangements and the overall design (though not details) of a future free trade agreement
  • Parliamentary ratifications of the deal (EU and UK) take place over the following two months and Britain leaves the EU, including the single market and customs union, on 29 March 2019
  • Britain retains some features of membership during the transitionary period, which runs to the end of current EU budget framework, which is the end of 2020
  • During transition, Britain continues to make ordinary contributions to the EU. Retained features are likely to include customs privileges and most single market rights
  • From the beginning of 2021, the UK enters a new relationship with the EU, based on an extensive free trade agreement
  • At that point, Britain ceases to make large contributions to the EU budget and only pays in much smaller amounts for specific programmes, as Switzerland does

In the ‘no deal’ scenario, Britain relies on World Trade Organization (WTO) trading rules. Markets and policymakers react in ways that blunt the impacts to a significant degree. In the ‘deal with ambitious policies’ case, the political settlement is much the same as in the ‘compromise deal’ case, but policymakers are able to maximise the opportunities from leaving the EU.

Authors

Justin Chaloner
Glyn Chambers
Melanie Debono
Alexandra Dreisin

Trade

The EU is Britain’s largest trading partner, but has been declining in importance and is likely to continue to do so. Nevertheless, with Britain likely to leave both the single market and the customs union in due course, it is likely that trade with Europe will decline in share terms. However, Britain will have the opportunity to pursue valuable new trading agreements with a wide range of countries outside Europe, where most of the global growth is now occurring.

Read the trade section

Base case schedule for other trade deals

Source: Capital Economics

2019 2020 2021 2022 2023 2024 2025 2026 2027 Partial EU customs union 2019 2020 2021 2022 2023 2024 2025 2026 2027 Partial EU customs union

Regulation

There is a significant body of evidence to suggest that EU regulations across a very wide range of areas have added to the costs of business and, in a substantial number of areas, may have had a net cost for the economy overall. However, Capital Economics believes that there is high uncertainty around the political feasibility of substantially repealing most of these laws. Instead, Brexit may offer the UK the opportunity to pursue a different regulatory path in the future, potentially making it more competitive.

Read the regulation section

Deregulation where it may not be net beneficial Reduced costs Increased productivity and competitiveness
Gains to UK GDPNo deregulation Modest deregulation Ambitious deregulation Low case Base case High case Gains to UK GDPNo deregulation Modest deregulation Ambitious deregulation Low case Base case High case

Immigration

Migration from the EU has been high in recent years, but has dropped following the UK’s decision to leave the EU. It seems likely that measures to reduce immigration will be introduced after Brexit. Policy may change to restrict the number of low-skilled workers entering the country, but could also move towards attracting more highly skilled workers (including from outside the EU). Moreover, it is unlikely that the future immigration regime will involve a ‘hard land border’ between Northern Ireland and the Republic of Ireland.

Read the immigration section

Tailored policy for UK’s needs More focus on skilled workers Potential labour shortages in some sectors Slower population growth dragging on economic growth
EU net migration drops post-2021 to aroundLow case Base case High case Meeting the migration target Just under 2010-12 levels Brexit, but with free movement EU net migration drops post-2021 to aroundLow case Base case High case Brexit, but with free movement Just under 2010-12 levels Meeting the migration target

Manufacturing

Manufacturing exports to the EU account for around 90% of total British goods exports to the union. They also make up some 35% of value-added production in the sector. With trade in goods being regulated by single-market rules and with the third highest share of EU workers, the effects of Brexit, both positive and negative, on manufacturing may be stronger than in many other sectors’ cases.

Read the manufacturing section

Removing tariff and other barriers to non-EU markets Deregulation savings WTO tariffs and non-tariff barriers on EU trade Immigration quotas
Manufacturing sector expands per annum (2017-2027)Low case Base case High case Deal with ambitious policies No deal Compromise deal Manufacturing sector expands per annum (2017-2027)Low case Base case High case Deal with ambitious policies Compromise deal No deal

Financial services

The loss of passporting rights will have an effect, but the proportion of business that will actually relocate will likely be a small fraction of the industry. Euro clearing is a more likely loss, but Brexit will open the possibility for Britain to gain a regulatory advantage over continental rivals and possibly to negotiate trade deals that are more inclusive of, and favourable towards, financial services.

The City of London will likely remain a hub of prosperity after March 2019. London’s pre-eminent position as a global financial centre predates the single-market, and the City possesses intrinsic advantages which will endure.

Read the financial services section

Avoidance of future EU regulations Inclusion of the sector in future FTAs Loss of 'passported' and related activities. Loss of euro clearing
Financial services industry growth per annum to 2027Low case Base case High case No deal and complete passporting loss Compromise deal with limited losses Cushioning deal and new global opportunities Financial services industry growth per annum to 2027Low case Base case High case No deal and complete passporting loss Compromise deal with limited losses Cushioning deal and new global opportunities

Life sciences

Pharmaceutical exports and the UK’s place in the launch sequence of medicinal products should be unaffected by Brexit, while the relocation of the European Medicines Agency (EMA) seems unlikely to have much of an effect. Participation in many life sciences-related EU programmes is possible for countries outside the union, and Britain could continue to be involved. There are potential benefits in terms of deregulation, cooperation with the United States and perhaps some of the much-discussed £350m / week for healthcare!

Read the life sciences section

Removal of clinical trials directive Additional spending on healthcare End of participation in EU programmes Relocation of EMA-related activities
Life sciences industry growth per annumNo deal and weaker economy Compromise deal with modest partnership / deregulation upsides Wave of new opportunities Low case Base case High case Life sciences industry growth per annumNo deal and weaker economy Compromise deal with modest partnership / deregulation upsides Wave of new opportunities Low case Base case High case

Property

Capital Economics expects the performance of the property sector, a relatively well-insulated industry, to be more influenced by the performance of the broader macroeconomy than by Brexit itself. Demand for commercial property is more sectorally diverse than is commonly realised which suggests that concerns that a post-Brexit financial services slowdown will prompt a correction in commercial property prices appear over-played, as does the only modest increase in anticipated supply.

Meanwhile, the historic inflexibility of residential property prices suggests that a meaningful impact is only likely if Brexit causes a material change in macroeconomic conditions, something which Capital Economics does not envisage.

Read the property section

Small gains from deregulation Uncertainty - fall in new starts Macroeconomic or financial downturn
House price growth per annum to 2027No deal and resultant sluggish growth Compromise deal and benign conditions Deal and trade boost in other sectors Low case Base case High case House price growth per annum to 2027No deal and resultant sluggish growth Compromise deal and benign conditions Deal and trade boost in other sectors Low case Base case High case

Construction

Construction is relatively insulated from developments with respect to trade as the industry exports and imports relatively little. In general, we expect the sector to be fairly unaffected by Brexit but it would be vulnerable to any economic slowdown or contraction in total demand. It could make small gains from lesser regulation, but lose out in terms of fewer EU citizens in the workforce.

Read the construction section

Minimal trade with Europe Small gains from less regulation Fewer EU citizens in the workforce Vulnerable to economic shocks
Low case Base case High case No deal and uncertainty Compromise deal and average performance Deal and good policies elsewhere in the economyConstruction output growth per annum to 2027 Construction output growth per annum to 2027No deal and uncertainty Compromise deal and average performance Deal and good policies elsewhere in the economy Low case Base case High case

Public finances

For the public purse, the issues are obviously the Brexit bill and the level of ongoing contributions to the EU in future. Capital Economics estimates a base-case bill of €38bn, which also covers payments for a one-and-three-quarter-year transition arrangement. Thereafter, Capital Economics anticipates that Britain will probably wish to participate in some EU programmes, but that the payments will be small.

Read the public finances section

Substantial or total reduction in EU contributions after transition Payment of exit bill to settle EU account Contribution to pay for transition aspects
Brexit billHigh bill and Norway equivalent contributions Mean bill and Switzerland equivalent contributions No post-Brexit payments Low case Base case High case Brexit billHigh bill and Norway equivalent contributions Mean bill and Switzerland equivalent contributions No post-Brexit payments Low case Base case High case

Consumers

Consumption held up well immediately after the referendum, but lower sterling / higher inflation has since weighed on household spending and consumer confidence to a degree. This may to reverse in the months ahead as inflation declines.

No deal may mean further sterling weakness, which could be detrimental for consumption again. However, the primary influence of consumer behaviour will be the performance of other parts of the economy such as the labour market and longer-term real wage growth.

Consumption could be boosted modestly if the UK adopted lower tariff schedules than the EU.

Read the consumers section

Lower tariffs deliver lower prices Economic boost from trade deals Further devaluations cause prices to rise Job losses cause a drop in spending
Consumer spending growth per annum to 2027No deal and further fall in the pound Compromise deal and benign circumstances Deal with ambitious policies Low case Base case High case Consumer spending growth per annum to 2027No deal and further fall in the pound Compromise deal and benign circumstances Deal with ambitious policies Low case Base case High case

Overall macroeconomic impact

At the outset it should be stated that, while Brexit could result in change on many issues, it is not likely to have a meaningful impact on the large proportion of the economy that doesn’t participate in international trade. Indeed, there are good reasons to think that the British economy will continue to perform well whether or not it is inside or outside of the EU. For example, the UK benefits from a prestigious higher education sector, a large pool of skilled employees in high-value sectors such as finance, biotechnology and information technology, good transport connections, a welcoming political environment, the global status of London, and a strong rule of law. The UK ranks ninth for ease of doing business in the World Bank’s Doing Business report.

No deal case: temporary slowdown but no cliff edge (Probability of occurrence: 35%)

High uncertainty Tariff and non- tariff barriers Lower pound and lower interest rates Savings on EU contributions Loss of certain access rights Faster pursuit of non-EU trade deals Trade disruption/ delays Policy shifts on tax, spend, regulation

In the ‘no deal’ scenario, without a withdrawal agreement with the EU, there are negative impacts stemming from high levels of uncertainty and EU trade being subject to tariffs and more non-tariff barriers, plus difficulties in ‘grandfathering’ existing trade deals, loss of access / equivalence rights and perhaps actual disruption to trade. Nevertheless, it cannot be ignored that markets and policymakers will react to those events. Interest rates would likely be very low, there would be no need for any contributions to Brussels after March 2019, and the government would probably react by cutting some taxes and perhaps supporting affected industries with subsidies. What’s more, the devaluation would help exporters, tariffs would boost government coffers, and trade negotiations with other countries would no doubt be accelerated.

Hence, we believe that even this scenario would not result in a major slowdown or recession, though it is to be expected that there would be some economic dislocation in 2019 and that economic growth in that year would therefore dip under 1%. The years of 2020 and 2021 also see weaker-than-trend growth, but the economy then picks up as things settle down.

Uncertainty 0.3% EU trade 0.6% Rest of world trade 2.1% Regulation 0.5% Immigration 0.8% Public finances 0.2% Net impact 1.1% Uncertainty 0.3% EU trade 0.6% Rest of world trade 2.1% Regulation 0.5% Immigration 0.8% Public finances 0.2% Net impact 1.1%

Compromise deal: steady as she goes (Probability of occurrence: 50%)

In the ‘compromise deal’ scenario, the positives from Brexit are likely to include:

  1. Reaching new trade deals with other developed and emerging markets
  2. Removing or reducing regulation in limited areas
  3. Savings on contributions to the EU

The negatives will likely be:

  1. Output lost during the current period of uncertainty that isn’t recouped afterwards
  2. Reduced trade with EU countries, including some financial services activities
  3. Some output loss from reduced migration

The graphic shows the extrapolated net effects on the overall output level by 2027, versus the status quo of EU membership.

Coupled with a loss in output due to uncertainty, the negatives are likely to be more dominant in the couple of years immediately after 2019; the positives are more likely to be dominant in the medium to long run, resulting in a net position that is slightly better than what would be expected with a continuation of EU membership on existing terms by 2027. This is based on the governments of the period being moderately successful in securing a free trade agreement with the EU, reaching deals with other countries and ending most contributions to the EU, but not assuming a great deal of progress on deregulation.

Deal with ambitious policies: the upside case (Probability of occurrence: 15%)

We consider a ‘deal with ambitious policies’ case in which further measures to boost the economy are enacted.

These would include expedited trade agreements, securing novel trade agreements that deeply incorporate services (particularly financial), setting an immigration policy based completely on boosting economic value added and undertaking targeted deregulation efforts.

As we set out in this report, there is also considerable doubt about the size of the benefits of the single market and the effects of leaving it. In a high case, it turns out that the losses are minimal.

Read the overall macroeconomic impact section

High-case
scenario

  • Faster trade deals
  • Services well included in trade deals
  • Single-market exit means no access loss
  • Optimal policy on EU migrants
  • Sizeable deregulation efforts
  • All sectors of the economy will experience a mix of positives and negatives from Brexit
  • ‘No deal’ will cause some damage, but will not be a ‘cliff edge’, and nimble policy adjustment could allow the economy to regain momentum afterwards
  • The government’s goal to make Britain a global leader in free trade is the best approach to make a success of Brexit – the more this is pursued, the more probable is a net benefit
TURBOBOO S T

Free trade

There is strong evidence of significant benefits from the conclusion of free trade deals. Meta analyses of hundreds of papers suggest that the average boost to trade volumes could be 46%

Single market

Benefits of economic intergration beyond free trade have diminishing returns. Analyses suggest that the single market only added approximately 1.3% to British output

EU vs Free trade

Moving from close integration with one block to a suite of free trade agreements leads to more trade. We find that British trade could be booted by 6.3% over 10 years by doing so

Unilateral free trade

Unilateral free trade could bring net economic gains, but may be politically difficult. A partial version leads to more modest price falls – 0.5% – but poorer consumers would benefit most

Financial services

Financial services have a wide range of possible Brexit outcomes. Our estimates of growth rates over 2017-2027 range from 0.6% to 3% depending on what happens with EU and other trade

Life sciences

Of all sectors covered here, life sciences are the most likely to record net gains from Brexit. Proposed downsides generally have little basis and some deregulation and investment can be expected

‘Brexit bill’

Based on a full membership contribution for 2019 and 2020, we find an estimated Brexit bill of €37.8bn. But the UK could argue that the EU should have a duty to mitigate some liabilities within this

Contribution savings

When Britain leaves the transition period, it should be able to move to only paying the EU for specific programmes. Based on the Swiss experience, this will result in a 93% reduction in contributions

‘No deal’ outcome

Compared to the ‘compromise deal’, ‘no deal’ sees a loss of output of 2.4% by 2023, but 0.8% is recouped by 2027. Relative to ‘Remain’, the difference in 2027 is only 0.5%

Economic growth

In the expected ‘compromise deal’ case, GDP growth is around 2% during the transitionary phase, dips to 1.6% in 2021, then rises towards 2.5% thereafter

The views and opinions expressed in this report are solely those of Capital Economics and do not necessarily reflect the views of Woodford Investment Management.

Woodford Investment Management Ltd is authorised and regulated by the Financial Conduct Authority (firm reference number 745433). Incorporated in England and Wales, company number 10118169. Registered address 9400 Garsington Road, Oxford OX4 2HN.

Woodford Patient Capital Trust plc is incorporated in England and Wales, company number 09405653. Registered as an investment company under section 833 of the Companies Act 2006. Registered address Beaufort House, 51 New North Road, Exeter, EX4 4EP.

The Woodford Funds (Ireland) ICAV (the “Fund”) has appointed as Swiss Representative Oligo Swiss Fund Services SA, Av. Villamont 17, 1005 Lausanne, Switzerland. The Fund’s Swiss paying agent is Neue Helvetische Bank AG. All fund documentation including, Prospectus, Key Investor Information Documents, Instrument of Incorporation and financial reports may be obtained free of charge from the Swiss Representative in Lausanne. The place of performance and jurisdiction for all shares distributed in or from Switzerland is at the registered office of the Swiss Representative. Fund prices can be found at www.fundinfo.com.

© 2018 Woodford Investment Management Ltd.
All rights reserved.

Are you sure?

By disagreeing you will no longer have access to our site and will be logged out.

Privacy Preference Center

Experience Tracking

Lets our analytics service track you across our different websites and enables data sharing among our different marketing tools.

AMCV_[Tracker ID]@AdobeOrg (Adobe), [Tracker ID]@AdobeOrg (Adobe)
Adobe Analytics (helps us provide you with more relevant experiences and content based on your likely interests). Cookies: demdex, dextp, dpm, DST, DSTJS
Twitter personalisation (by better understanding how devices are related, Twitter can use information from one device to help personalize the Twitter experience on another device). Cookies: personalization_id
Heap Analytics (provides metrics on user behaviour and actions throughout the site). Cookies: _gid, _hp2_id.[Tracker ID],_hp2_props.[Tracker ID], _ga, _mkto_trk, optimizelyBuckets, optimizelyEndUserId, optimizelySegments, raygun4js-userid, _attribution_referrer, _csrf
Adobe Analytics (provides you with more relevant experiences and marketing messages based on your likely interests). Cookies: _tmae ,ev_sync_dd,ev_sync_yh,everest_g_v2,gglck

Traffic Metrics

Allows Woodford to aggregate information on website usage and popular content

_ga, _gid
Google Analytics (tracks and reports website traffic and user behaviour): Cookie: CONSENT
New Relic (application and server performance monitoring – allows us to spot problems with our website code and improve them to keep things running smoothly). Cookie: JSESSIONID
Adobe Analytics (provides you with more relevant experiences and marketing messages based on your likely interests). Cookies: __qca,__smToken, _ga, _mkto_trk, _rtbmedia

Search History

Populates the 'recent searches' section of the website navigation.

wf__recent_searches_untracked

Close your account?

Your account will be closed and all data will be permanently deleted and cannot be recovered. Are you sure?