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February 22, 2019

Consumer packaged goods sector braces for Brexit fallout

Exiting the customs union with a tax barrier would bring price increases straight to consumers, and therefore lower demand for fast moving consumer goods in the UK.

By GlobalData Consumer

The lead up to the UK’s expected departure from the EU has generated a large number of macro-economic symptoms that may impact negatively on the fast moving consumer goods (FMCG) industry after 29 March.

The pound dropped after the Brexit vote and never recovered to previous levels. Inflation in the UK escalated from near 0.5% to over 2.5% making it more difficult to purchase goods produced in the Eurozone.

In addition, exiting the customs union with a tax barrier would bring price increases straight to consumers, and therefore lower demand for FMCGs – the greater the tax barrier the higher the price and the lower the demand, particularly for non-essential items. A no-deal Brexit scenario would be most costly as the tax will be highest.

Relocation, depreciation and demand expectations

Furthermore, the possibility of companies moving out – headquarters, offices or production – risks a further depreciation of the pound. This creates a vicious circle that has the potential to lead to a harsh and crude recession. Examples can already be seen in the behaviour of some large companies such as Sony and Panasonic moving offices to continental Europe, taking assets and jobs out of the country.

The depreciation of the pound combined with an accelerated inflation rate can increase the prices of FMCGs, especially those not produced within the UK.

An increase in price will lower the demand for a product – at least temporarily. But if that increase in price is generalised to all FMCGs and not balanced with salary increases, then the reduction of consumption will run across the whole economy, decreasing the quantity of money in circulation and contracting purchasing power and spending per capita.

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The inflationary prospect is worsened in view of the fact that 53% of products imported into the UK are produced in continental Europe. That means more than half of total imports would be affected by inflation until imports substitutions are put in place.

Companies such as Tesco and Marks & Spencer are increasing the stocked merchandise produced in the EU in order to affront a no-deal Brexit with the smallest possible cost increase for the short-term.

One scenario is that before the government has any time to act on this, the UK economy will reach the end of the spiral. By then, the power of unemployment, recession and a lack of money circulating all will have counterbalanced the loss of assets of the economy and its lack of competitiveness outside the vast European market.

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