Brexit and businesses: sectoral impact analysis

1. Introduction

1.1 Background

In September 2018, the Scottish Government (SG) Directorate for International Trade and Investment (DITI) commissioned EY to undertake a Sectoral Impact Analysis and Brexit Readiness Assessment. The purpose of this exercise was to:

1. Understand Scottish business sectors’ key challenges and preparedness for Brexit; and

2. To inform SG negotiating offensive or defensive positions on trade policy matters by identifying where Scotland has a sectoral or local interest which differs from the UK at large and/or has a comparative export advantage to be maintained, and by making certain they reflect data and views from the Scottish business community.

This work was undertaken over a period of three months and provides an overview of the impacts of Brexit across a number of key Scottish sectors. The analysis builds on work already completed by the SG, and produces insights that are as much qualitative as quantitative in nature to bring out the key facts, risks and opportunities by sector.

In this report, EY considers the possible impacts of a Brexit under a World Trade Organisation (WTO) outcome, referred to in this paper as a “no deal” Brexit. It draws on a range of literature, as well as a dynamic consultation with leading businesses in selected sectors. Analysis of wider Brexit risks and international trade opportunities was undertaken with specific reference to the Scottish context, and hence risks that would apply to the UK as a whole are not the focus of this report.

1.2 Approach

The Sectoral Impact Analysis comprised two elements. The first was a Rapid Synthesis Survey of existing analysis on Brexit impacts and mitigation strategies. This drew on existing material prepared by SG, augmented by additional research and analysis from other third-party sources, and EY’s own experience of assisting businesses with preparing for Brexit.

The output of this stage of work was a brief report that summarised findings on Brexit risks and international opportunities for key Scottish sectors. Findings were presented via a “RAG”^[17] rating that captured the scale of the impact of Brexit, the relative importance of these sectors to the Scottish economy and factored in SG trade and investment ambitions. The summary RAG rating from this exercise is set out in Table 1. The synthesis was used in two ways:

• To determine which sectors would progress to the dynamic consultation process.
• To refine a set of questions for interrogating Brexit impacts in key sectors during dynamic consultation. Sectors selected for dynamic consultation were food and drink, chemicals, construction, creative industries, energy, financial and business services including fintech, life sciences, logistics and high value manufacturing.

The second element of the work was a dynamic consultation. This took the form of nine workshops that EY ran with businesses (predominantly larger enterprises, but also with smaller ones), trade associations and SG and SG Enterprise Agency sector leads. Workshop attendees were identified through a joint process between EY and SG, with SG issuing all invitations in the name of the Minister for Trade, Investment and Innovation.

In these workshops EY sought to capture businesses’ views on Scotland-specific Brexit risks, as well as actions that could be taken by SG, the UK Government (UKG) or the businesses themselves, to mitigate these risks or to harness future trade opportunities.

In total 82 organisations were contacted during the dynamic consultation, this included 49 businesses and 23 trade associations who attended workshops, as well as a further ten organisations which were subsequently contacted by telephone (see Appendix A for a full list of contributors).

1.2.1 Sectors selected for dynamic consultation

The nine sectors selected for dynamic consultation were chosen based on the perceived potential scale of risks of Brexit to these sectors, their significance to the Scottish economy, and the uniqueness of these sectors in Scotland compared to the rest of the UK.

Sectors most likely to be impacted by Brexit, or which have specific Scottish characteristics, include food and drink, fisheries and aquaculture, and energy. A number of growth sectors were also captured including life sciences, chemicals, creative industries, and financial services. Logistics was included to capture specific Brexit issues arising from Scotland’s physical location, and the particular challenges of Scottish export sectors located in the Highlands and Islands region. Construction was included at the request of SG as there were concerns that housebuilding in Scotland would be disproportionately affected given that EU-imported timber is used more extensively in housebuilding than in the rest of the UK. Finally, high value manufacturing was identified as a gap in the Rapid Synthesis Survey, and hence was also included in the dynamic consultation.

The chosen nine sectors account for over 40% of the Scottish Gross Value Added (GVA) (see Table 2)^[18]. They align broadly with the Office for the Chief Economic Advisor (OCEA) analysis of Scotland’s revealed comparative advantage in exports compared to the rest of the UK,^{[19 20]}. An overview of the sectors included in the dynamic consultation, including Scottish specific characteristics, is provided in Appendix B.

Table 2: Key sector metrics

Source: EY analysis; various sources identified in footnotes