Deloitte Conference 24 June 2016

7/25/2019 Deloitte Conference 24 June 2016

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Mark FitzPatrick, Ian Stewart, Rick Cudworth, Sally Jones, Christiane Cunningham |24th June 2016

EU referendum:

Outcome and implications


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2016 Deloitte Touche Tohmatsu.

Who got the result right?

Remain Leave

Opinion polls:trend*

52% 48%

Opinion polls:

last**55% 45%

SpreadEX*** 55.5% 44.5%

Outcome 48% 52%

*Average of last 6 opinion polls taken between 16th and 22nd

June by What UK Thinks. Data presented in rounded, wholenumber format

**Populus on line poll & before polling opened. Data presentedin rounded, whole number format

***Spread betting, mid-point of range, as at 1400 23rd June


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1. Economics: negative growth shock

Short-term

Major negative for liquid UK assets, equities,

Business confidence, M&A, capex, FDI, hiring down. Focus on cash and costcontrol

HMT: UK GDP flat in next 2 years. Consensus: GDP of 1.4% 16, 0.7%17 vs2.2% trend

Medium term

Hinges on speed/success of negotiations: long and fractious => prolongeddisruption

Long term

Function of post-exit trade and UKs ability to exploit freedoms outside EU


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Market reaction to leave vote at 9.30am 24th June

Uncertainty hits sterling, equities

Overnightchange:

23rd/24th June

Intraday change:last year

High Low

FTSE 100 -4.9% 3.6% -4.7%

DAX -6.8% 5.0% -4.7%

/$ exchange rate -18c 4c -2c

/ exchange rate -7c 2c -3c


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Heightened uncertainty => lower appetite for risk

Deloitte CFO Survey: risk appetite and levels of uncertainty

Latestreading,Mar 16

Latestreading,Mar 16


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-8

-6

-4

-2

0

2

4

6

Feb-06 Jan-07 Dec-07 Nov-08 Oct-09 Sep-10 Aug-11 Jul-12 Jun-13 May-14 Apr-15 Mar-16 Feb-17

Remain GDP Leave GDP

Economists forecast knock to UK GDP in 16 and17

UK real GDP profile (YoY%), actual and consensus forecasts

2015 2016 2017 2018-26 avg.

Remain 2.3 1.9 2.1 2.1

2015 2016 2017 2018-26 avg.

Leave 2.3 1.4 0.7 2.1

Consensus Economics forecasts, % chg yoy, actual, forecast


7/362016 Deloitte Touche Tohmatsu.

Poll question 1

In the medium term e.g. over the next three years, how do you think yourorganisation will perform compared to the position if the UK had voted to Remain?(Please select only one answer.)

Profits significantly higher (5+%)

Profits slightly higher (1-5%) Negligible change

Profits slightly lower (1-5%)

Profits significantly lower (5+%)

Don't know / not applicable



UK ranks as highly competitive

Heritage Foundation World BankWorld Economic

Forum#1 Hong Kong Singapore Switzerland

#2 Singapore New Zealand Singapore

#3 New Zealand Denmark United States

#4 Switzerland South Korea Germany

#5 Australia Hong Kong NetherlandsUnited

Kingdom10 6 10

Sweden 26 8 9

Poland 39 25 41

Spain 43 33 33

France 75 27 22

Italy 86 45 43

Greece 138 60 81

Business Index and Heritage Foundation Index of Economic Freedom

*Higher rankings indicate better, usually simpler, regulations for businesses, greater ease of doing business,stronger protections of property rights and lower corruption.

Global competitiveness rankings



2. UK politics and policy

1. Whos in charge: PM, Cabinet, Parliament, Leave campaign?

Current favourites to succeed PM: Boris Johnson (4/5), Theresa May(9/4), Michael Gove (9/2), Andrea Leadson (12/1), Priti Patel (16/1)

2. UK Government/authorities seek to counter negative shock/uncertainty:

Strong free market, open for business signals to markets

Tax cuts?

Suspend fiscal, inflation targets?

Liquidity to banking sector, quantitative easing?

More ECB QE?

3. UK appoints lead negotiator, departmental Task Force, Cabinet Committee

4. Tests capacity, absorbs energies of civil service which is smaller than in 75year

5. Home nations: Scottish referendum? Northern Ireland repercussions?

Huge political and administrative challenge


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3. Mechanics

1. No precedent or template for exit of a major EU member state2. Article 50 starts two year negotiation period

3. PM Cameron has said Article 50 would be invoked immediately; Leave wantsinitial discussions with EU first

4. Leave plan to legislate opt out of ECJ, EU migration, EU Communities Act 72

5. Parliament: c71% MPs Remain, c23% Leave, 6% undecided

6. Leave aims for deal by May 2020

7. Qualified majority (20/27 member states) needed on post-exit tradeagreement

8. During negotiations: existing regulations remain; UK has no vote on EU

matters

9. Two year period can be extended by unanimous agreement; if noagreement/extended negotiation UK begins to trade with EU as a non-member, probably under WTO rules

10.Fractious or harmonious divorce?

Uncharted territory


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Fractious versus harmonious divorce

Harmonious

Uncertainty and risk damage all

Tariffs damage all:

EU is UKs largest singletrading partner (44% of UK

exports);

UK is EUs largest singletrading partner (16% of allEU exports)

EU has history of pragmatism:

no bailout rules, euro areaentry criteria

EU has other concerns =>needs Brexit resolution?

Fractious

Deter other secessionists

Single UK aim? UK MPs favourRemain

27 EU voices to be heard

Trade deals take time: Canada sixyears, Mexico four years, Korea fouryears

Britain lacks the skills to go solo ontrade deals: former trade

negotiator

Extending two year negotiationsrequires unanimity

EU has other concerns =>Brexit not a priority?

Key determinant of speed, success of negotiations


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Possible alternatives to EU membership

EU member

EEA

(Single

Market only)

EFTA

(Free Trade

Agreement)

Customs

UnionMFN Duty-free

28 Europeanmembernations

Norway,Liechtenstein,

Iceland

Swiss Turkey Australia Monaco,Singapore

Free movement of goods, services,

and capitalYes Yes Yes No No No

Free movement of people Yes Yes Yes No No No

Free to negotiate trade deals and

set tariff levels with non-EU

countries

No Yes Yes No YesIn principle,

but slower

EU laws and

regulation

Influence Yes Very limited No No No No

Compliance Yes Yes

Yes, but

some opt-outs

Some No No

Fiscal contributions Yes

Yes

(83% of full

rate)

Yes

(52% of full

rate)

No No No

Common Agricultural Policy (CAP) Yes No No No No No

No single template for life outside the EU


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4. Impact on the EU

Biggest political blow to EU in 65 years

On top of migration and euro crises

Headwind for nascent EU recovery

Those closest to UK - Ireland, Netherlands, Norway, Switzerland - mostexposed

Emboldens Eurosceptic parties in EU: pressure for referendums elsewhere

Electoral test: elections ahead in Spain, Netherlands, France, Germany byautumn 2017

Loss of UK => more protectionist EU?

A crisis for the EU too


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The future of the EU

Step-up integration?

Multi-speed Europe?

Muddle through?

1.

2.

3.

4.

Brexit, further secessions

Slow growth

Migration, borders

Fixing the euro

Challenges Response


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High point of UK integration, growth in 90s and 00sEU GDP growth (%YoY): Actual and forecast

-5

-4

-3

-2

-1

0

1

2

3

4

5

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019

Singlemarket

92

Schengen95 Single

currency99

Enlargement:Poland,

Hungary etc.04

Forecasts

Rapid growth,rapid integration(avg. GDP 2.4%)

Slower growth,slower integration(avg. GDP 1.5%)

Euro crisis12


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Euroscepticism not only a UK phenomenon


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Populist parties on the rise

Support for populist parties of left and right

15%

24%

28%

28%

28%

49.70%

0% 10% 20% 30% 40% 50% 60%

GermanyAlternative for Deutschland (AfD)

SpainPodemos

NetherlandsFreedom Party

France

Front National

ItalyFive Star

Austria

Freedom Party

Latest poll dates: Austria (May 16), Italy (May 16), France (Dec 15), Netherlands (Jan 16),

Spain (Jun 16), Germany (May 16)


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Coming up: big test of European public

26th Jun 2016: Spanish general election

Autumn 2016: Hungarian referendum on EU-wide migrant quotas

Oct 2016: Italian referendum on Renzis constitutional reforms

Mar 2017: Dutch general election

Apr/May 2017: French presidential election Autumn 2017: German federal election

Significant European elections


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Brexit => less free trade, more market-sceptic?

Balance of power shifts in EU

Source: Open Europe


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EU referendum: outcome and implications

Conclusions

1. Major shock to UK growthbut diminishes over time

2. UK has strengths: institutions, resilience and competitiveness

3. Epic political, administrative challenge for the UK and the EU

4. EU rules remain during 2+ year negotiations

5. Leave want end to free movement => distant relationship with EU

6. Brexit adds to EU crisis of institutions, growth, public support in Europe

More questions than answers

1. UK: who leads and how?

2. What does the UK want?

3. Fractious or harmonious divorce?

4. Dutch, French, German elections?

5. Multi speed Europe, Federal Europe?


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Poll question 2

What is the most pressing action required of your organisation in the immediateterm e.g. over the next month? (Please select only one answer.)

Managing our currency exposure to Sterling volatility

Managing our cash flow and debt finance position

Reassuring our key stakeholders regarding our business's ability to cope withshort term economic shocks

Identifying our most critical issues so we can form a plan for lobbyinggovernment

Don't know/ not applicable


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Navigating through uncertainty and changeThree steps to survive and thrive

Brexit Lab1 Strategic Choices2 Monitor and Act3

NAVIGATING UNCERTAINTY

Establish Task-force

and Management

Office

Identify impacts - risks

and opportunities

Identify and take any

immediate actions

deemed necessary

Prepare clear and

consistent

communications

Define choices and

build a strategic

response plan

Define decision

points (triggers) so

that actions are

timely and

proportionate to thesituation as it unfolds

Monitor economic,

political and business

data sources

Take action if or when

triggers are met


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Navigating through uncertainty and change

A Brexit Lab format will help you more quickly understand what you need to do

and when

Bring the right people

together from across the

organisation from the outset

Use wargaming techniques

to accelerate thinking, develop

more robust perspectives and

build consensus more quickly

Use well-designed but simple

scenarios to help cut through

the fog of uncertainty


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Navigating through uncertainty and change

The outcomes from the Brexit Lab will enable you to create a strategic responseplan. This plan will outline clear actions and their associated trigger events

Understand the choices and options now available to you

Make informed decisions on where you want to play and how

Develop your strategic response plan

Effectively monitor data sources to minimise strategic drift

Consider what you want to influence and your key priorities in

policy or negotiations


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Navigating through uncertainty and changeA timeline to maximise opportunities, minimise risks

Take immediate

actions where

appropriate

Start

now

2016Govt. likely to invoke

Article 50

2018 / 2019Negotiation deadline(under Article 50)

Possibleongoing

negotiations(if agreed by all

EU Member States)

Expected 2 year negotiation period Future arrangements are realised

New relationships with countries outside of EU develop

Monitor and Act3

Brexit

Lab1

Strategic

Choices2

Our strategic

response plan

Within3-6 months Period of increasing certainty in relation to Brexit

Be prepared markets, consumers, competitors and

suppliers behaviours will change rapidly


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So what might it mean for trade?

EU member

EEA

(Single

Market only)

EFTA

(Free Trade

Agreement)

Customs

UnionMFN Duty-free

28 Europeanmembernations

Norway,Liechtenstein,

Iceland

Swiss Turkey Australia Monaco,Singapore

Free movement of goods, services,

and capitalYes Yes Yes No No No

Free movement of people Yes Yes Yes No No No

Free to negotiate trade deals and

set tariff levels with non-EU

countries

No Yes Yes No YesIn principle,

but slower

EU laws and

regulation

Influence Yes Very limited No No No No

Compliance Yes Yes

Yes, but

some opt-outs

Some No No

Fiscal contributions Yes

Yes

(83% of full

rate)

Yes

(52% of full

rate)

No No No

Common Agricultural Policy (CAP) Yes No No No No No

The UK hasnt negotiated a trade agreement for 40+ years


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Indirect taxes will be more impacted than direct taxesExpressly governed by EU Treaties

Other indirect taxes largely or entirely unaffected

Almostentirelygoverned byEU law

Domestic lawwill be needed

Trade with EU

becomesimport/export

Customs Duty

Not currentlyfullyharmonised

Trade withEU no longerintra-EU

Excise Duty

Fullyharmonised

Changes torates andreliefs?

Invoicing andreporting

VAT

The UK willno longer bebound by the

Capital DutyDirective

Capital duty


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Direct taxesSolely a national competence

Relevant EU Law

Treaty Freedoms - Wouldprevious UK infringement

changes be reversed?

Directives would no longer apply

Some reliefs could be withdrawn

Multilaterial Convention on MutualAdministrative Assistance in TaxMatters

What would change?

Domestic law remains onthe statute books

Direct taxes are not expressly dealtwith by EU Treaties

EEA membership would meancompliance with the Treaty freedoms


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State Aid

IT systemschanges

Currentlitigation and

claims

Company law

Accounting law

Deferred taxassets

Pensions

Disputeresolution

Harmful tax

practices

TAXIMPLICATIONS

OFCOMMERICAL

ISSUES

Other tax considerationThings to think about


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Further informationVisit www.deloitte.co.uk for further information
http://www.deloitte.co.uk/http://www.deloitte.co.uk/


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Continue the discussion

Feel free to circulate these slides, and listen again for 90 days here:

http://deloi.tt/1UgYqDm

Follow weekly EU-related newsflow and economic developments bysubscribing to theDeloitte Monday Briefingjust Google us or visit:http://blogs.deloitte.co.uk/mondaybriefing/

Visit Deloittes EU referendum website for further information andbriefing materials: http://www2.deloitte.com/uk/en/pages/global-markets/topics/eu-referendum.html
http://deloi.tt/1UgYqDmhttp://blogs.deloitte.co.uk/mondaybriefing/http://blogs.deloitte.co.uk/mondaybriefing/http://www2.deloitte.com/uk/en/pages/global-markets/topics/eu-referendum.htmlhttp://www2.deloitte.com/uk/en/pages/global-markets/topics/eu-referendum.htmlhttp://www2.deloitte.com/uk/en/pages/global-markets/topics/eu-referendum.htmlhttp://www2.deloitte.com/uk/en/pages/global-markets/topics/eu-referendum.htmlhttp://www2.deloitte.com/uk/en/pages/global-markets/topics/eu-referendum.htmlhttp://blogs.deloitte.co.uk/mondaybriefing/http://deloi.tt/1UgYqDm


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Questions and answers


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Contact information

Rick Cudworth

Telephone: +44 20 7303 4760Email: [email protected]

Sally Jones



Mark FitzPatrick


Ian Stewart


Christiane Cunningham


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Deloitte Conference 24 June 2016

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