Analysis by Greg Miller
Last week’s UK vote to leave the European Union instantly darkened the economic landscape for the UK and Europe, plunging both into a potentially lengthy period of uncertainty that will itself have economic consequences separate from the longer term impact of the UK being out of the EU.
IHS slashed UK GDP growth forecasts from 1.9% to 1.5% for 2016, 2.4% to 0.2% for 2017, and 2.3% to 1.3% for 2018. According to IHS, major economic and political uncertainty will be a fact of life in the UK for a considerable time, weighing down on business and household confidence and behavior and thus dampening corporate investment, employment, and consumer spending.
Within the 19-nation Eurozone, IHS believes that the growth outlook has weakened appreciably following the Brexit vote. Prior to the UK referendum vote, IHS had been relatively upbeat about Eurozone GDP growth prospects, seeing GDP growth at 1.7% in 2016, 1.8% in 2017 and 1.6% in 2018. Post-UK vote, IHS is cutting its Eurozone GDP growth forecasts to 1.4% in 2016, 0.9% in 2017 and 1.4% in 2018.
The impact on shipping, a global industry that is affected by global realities of supply and demand for shipping capacity, is expected to be more muted in the aftermath of the Brexit vote and will vary by sector. Shipping executives and analysts paint a generally positive post-Brexit picture for crude and product tanker owners but are warning of negative implications for the dry bulk and container ship sectors.
Representing roughly 2% of global GDP, the UK won’t by itself have a major impact on petroleum volumes; rather the expected volatility and uncertainty in the petroleum markets over the timing and duration of the UK’s separation from the EU could be positive for the tanker sector.
Other factors that could support the tanker markets include the increase in the value of the yen since the Brexit vote, which will make Japanese-built ships more expensive and thus potentially curtail vessel supply. In the aftermath of the Brexit vote, IHS believes, the U.S. and Japan will likely see significant unwelcome appreciation of their currencies, given their roles as global safe havens.
Overall, there is a strong potential for further constraints on capital availability for shipping, already a growing issue over the past year, which could further could keep vessel capacity growth in check but could further negatively impact depressed, capital-dependent sectors such as containers and dry bulk. The Brexit vote represents yet another hit on European commercial banks, the traditional lenders to shipowners whose stocks have plummeted in the wake of the Brexit vote. These institutions – which are already besieged by new regulations – are likely to be even more reluctant to lend to shipping than they were prior to the Brexit vote.
That is potentially positive for currently healthy sectors like crude and product tankers, where owners have significant cash reserves and capital is used for growth. For these sectors, capital constraints are a positive because they create a barrier to entry and protect against new capacity that could dampen future earnings. On the other end of the spectrum are depressed shipping sectors like dry bulk and containers, in which cash reserves have been whittled down by years of depressed rates and a rate recovery is still potentially years away. Such owners require capital not for growth, but for survival – and financial unrest following the Brexit vote could cost them their lifeline.
Global trade is already lagging global GDP growth, and an economic slowdown in Europe could threaten to bring containerised demand growth into negative territory by lowering European demand for Asian containerised imports and negatively impacting U.S. exports due to a higher U.S. dollar.
For UK shipping, the impact will potentially be broad but not immediate. The key issues for UK shipping are visas and work permits, fiscal arrangements including tonnage tax, border controls at ferry terminals, and naval collaboration within Europe to counter piracy and rescue of migrants.
Any change to visa and work permit rules could undermine London’s status as a maritime services center. Shipping companies need to be able to keep open, staff, and operate representative offices in the UK without punitive or restrictive measures. Shipping in London is principally focused around services to the industry, such as legal, insurance, brokerage and provision of such services should not be directly affected by Brexit. But should Brexit result in the departure or geographical refocusing of major international banks and financial institutions, this could impact London’s stature as an international shipping center.
In maritime insurance, free trade benefits of EU membership seen as important in maintaining London’s stature as a hub for global insurance firms based in the UK as well as those that use London as their headquarters for the Europe market. Thus continued access to European markets is seen as essential and unknown due to uncertainty with the timing and details of UK’s exit from the EU.
