Brexit was predicted by its opponents and even neutral economists to precipitate at best a sharp economic downturn in the UK and at worst a deep recession. So far, four months after the country voted 52/48% in a referendum in June to leave the European Union, neither has happened. Nor does it look likely in the short term.

In the third quarter GDP growth went up 0.5% in the UK—the fastest among the G7 leading economies in the world. This compared with a pre-referendum forecast of 0.1% by the Bank of England, the country’s independent central bank.

In early November the Bank raised its growth forecast for the UK in 2016 to 2.2% from 2% and almost doubled next year’s from 0.8% to 1.4%, although this outlook was accompanied by a warning of a steep rise in inflation. The big negative impact of the referendum has been a 15-20% fall in the value of pound sterling against the US dollar and 8-10% against the euro.

The UK chemicals industry has also been performing well in comparison to a 0.4% fall in industrial output in the third quarter. The country’s chemicals and pharmaceuticals sector is the fifth largest in the EU in terms of sales with exports of around £25 billion (€31 billion) and imports of £26 billion, according to 2014 figures.

“The figures for chemicals and pharmaceuticals have been quite positive in recent months,” says Stephen Le Roux, head of economics, at the Chemical Industries Association (CIA), the country’s main chemicals trade association. “In contrast to the rest of the manufacturing sector, production has been rising. Exports have also been going up as a result of a depreciation of the pounds against foreign currencies earlier this year. The benefits of the post-referendum depreciation will not show up in the export figures until the next 1-2 months.”

Investment Projects

So far no major investment projects have been cancelled. Ineos, the Anglo-Swiss petrochemicals operator, has been putting around $2 billion in a scheme to bring US low-cost shale ethane to its petrochemicals complex at Grangemouth, Scotland, and also to a smaller site at Rafnes, Norway. Saudi Basic Industries Corporation (SABIC) is also investing in a similar project to bring US ethane shipments to its ethylene cracker at Teesside, northeast England.

Chemical companies in the UK—or at least among the CIA’s 100 strong membership which is dominated by foreign-owned multinationals--are more upbeat about future prospects than they were before the vote.

“Preliminary results from our third quarter survey of our members indicate they are more positive about the short-term outlook than they were in the second quarter before the referendum,” says Steve Elliott, CIA chief executive. “This is probably because the devaluation of the pounds is strengthening sales and margins.”

However chemical companies are fully aware of the difficult times ahead. First, there are uncertainties about the future while the UK government negotiates a withdrawal agreement with the remaining 27 EU member states after which the country should formally leave the Union in 2019. But this uncertainty could drag on for several more years because of the likelihood that the UK will also have to thrash out, after withdrawal, a separate free trade deal with its former partners.

Also the UK can only complete free trade agreements with non-EU countries after a withdrawal agreement. It is hoping to clinch deals with high-growth emerging economies expecting that they will generate enough extra trade to replace that lost to European Union countries.

Free Trade Agreements

The extent to which UK trade with the EU—at present it accounts for 45% of UK exports and 60% of overseas chemical sales—declines will depend on the outcome of the Brexit negotiations. According to the UK government’s plans, these are currently scheduled to start next April after it formally notifies the EU of its intention to leave under Article 50 of the 2007 Lisbon Treaty which for the first time provided a procedure for member states to pull out of the Union.

The likely results of the negotiations have already been given two categories—one ‘soft’ and the other ‘hard’.

A soft exit would mean that the UK would continue to be a member of the EU’s single market or be given a status close to that position. The UK would be joining the non-EU states of Norway and Iceland in having access to the single market without tariff or non-tariff barriers. In return it would have to comply with EU regulations, such as REACh, and contribute to the EU’s budget without having any say in decisions on EU legislation.

A key requirement of single market membership is the UK would have to adhere to its four principles—freedom of movement of goods, services, capital and above all of labor.

Since the main reason for the Brexit campaign’s victory in the referendum was its demand for controls on levels of EU immigration into the UK, complete single market membership may be impossible. Instead it may have to accept a deal falling short of open access to the single market but with certain tariff and non-tariff restrictions being lifted for some sectors.

Single Market

If a single-market agreement is unachievable, the alternative would be a hard Brexit under which the UK’s exports and imports to and from the EU would be subject to tariff and non-tariff regulations.

In the worst-case scenario the UK’s trade relations with the EU would be based on the rules of the World Trade Organisation (WTO) with export and import tariffs on chemicals averaging 5.5-6.5%.

With non-tariff restrictions the UK would be in much the same position as any non-European country importing into the EU. The difficulty, however, would be not so much adherence with the EU health, safety and environmental regulations and items like rules of origin but the extra administrative work and costs in having to demonstrate compliance.

Strong supporters of Brexit prefer the ‘hard’ option because it would give the country the freedom to legislate as it wishes, not only in limiting numbers of EU migrants but also in areas like employment law and health, safety and environmental legislation.

However the UK chemicals industry and most other manufacturing sectors in the country are overwhelmingly in favour of a soft Brexit without tariff or non-tariff barriers.

In a recently issued Brexit manifesto the CIA has urged the government to aim for tariff-free access to the single market, an energy deal which ensures the UK has secure supplies of energy, an immigration policy with accessibility to supplies of skilled labor from the EU and a policy framework centred on a risk- and science-based approach to regulation. The association also wants the government to replace any EU funds for research and development which may be lost as a result of Brexit.

Downstream Chemical Users

“These are our priorities,” says Elliott. “We are now gathering evidence from our member companies to show the importance to them of our manifesto objectives.”

Downstream chemical users are calling on the government to pursue similar aims in the withdrawal negotiations, particularly on the issue of tariffs.

“Our companies want tariff-free access to the single market because of its importance both to their exports of finished products and imports of raw materials to make these products,” says Tom Bowtell, chief executive of the British Coatings Federation (BCF), which represents both coatings and inks producers., 58% of whose output is exported to the EU. “If our industry is to stay competitive, it is crucial that they are not burdened with 6.5% tariffs on raw materials, much of which currently comes from the EU.”

The government has been conducting face-to-face discussions with representatives of the chemical and other industries in the last few weeks but without revealing much about its own strategy for the imminent negotiations with the EU on Brexit.

“Over the last few weeks the pace of consultation by the government has definitely been picking up,” says Elliott. “But it is like grabbing fog when trying to find out what exactly the government’s position is on negotiations.”

Automobile Sector

The government, nonetheless, was forced to reveal at least an outline of its negotiating aims when Nissan pressed it for more clarity about its Brexit strategy so that the Japanese automobile company could decide whether to go ahead with investment plans for its Sunderland plant in the northeast of England, one of the largest and most productive in Europe.

As a result of talks and written assurances from the government that it was pursuing tariff-free access to the single market while pledging more funds for improvements in training and skills and in R&D projects relevant to Nissan and the automobile industry the Nissan board in Japan approved the investment for the production of two new sports-utility-vehicle (SUV) models at Sunderland generating 7,000 new jobs in an area which voted 60/40 for Brexit in the referendum.

The secretive pact with Nissan has triggered demands from the rest of the UK-based, mainly foreign owned, automotive sector with an annual output of 1.6 million that similar commitments be made to the whole industry. Other manufacturing sectors have been calling for comparable assistance.

“A sectoral solution to Brexit would be highly complex and the process of working out deals for each sector would be a nightmare,” says Elliott.

In fact the issues surrounding Brexit for the chemicals and other manufacturing industries, as well some leading services sectors, are looking so convoluted that there may well be a need after the statutory two years of negotiations for a transition period of five or more years before withdrawal is completed.