With so many companies exporting and importing across the EU, leaving the single market will impact the UK fashion and textiles sector

With so many companies exporting and importing across the EU, leaving the single market will impact the UK fashion and textiles sector

Brexit means Brexit and, following the Prime Minister's speech in late January where she set out what this will entail, Brexit appears to mean 'hard' Brexit. But what does it mean for the UK's fashion and textile industry, which accounts for tens of billions of pounds in GDP and hundreds of thousands of direct jobs? Greg Smith, head of trading at foreign exchange specialists Global Reach Partners, takes a closer look. 

Mrs May not only set out her firm intention that Britain's vote to leave the European Union (EU) will be translated into a full departure from the Single Market; she has also made it clear that there will be no special exemptions or separate deals for the likes of the city of London, Scotland or Northern Ireland despite the fact these regions/nations voted against Brexit.

While the Supreme Court has now ruled that Westminster will need to approve the Government's plans, the intention of leaving the single market could have direct implications for the UK fashion and textiles sector with so many companies currently exporting and importing across the EU.

In 2016, clothing values saw their biggest hike since 2010 according to the Office for National Statistics (ONS). The jump in the UK's consumer price index (CPI) was mainly driven by products that "largely come from abroad" said the ONS. The inflation rate in November rose to 1.2% and the core reading came in at 1.4%.

While many economists speculated that sterling's new-found weakness was likely to be the cause of higher consumer prices, the ONS declared there was no "explicit evidence" that the pound's weakness was the catalyst for marked-up price tags.

British consumers buoyant

Overall, the UK fashion industry is currently in a good place. Statistics published last summer showed the sector increased from GBP26bn to GBP28bn in value, an 8% jump. Employment in the clothing and footwear retail, manufacturing and wholesale sectors rose from 790,000 to 880,000, double the national average.

This healthy growth has come despite the fact that many EU-based suppliers to the UK fashion industry were forced to hike prices in the immediate aftermath of the referendum when sterling lost around 9% of its value against some other major international currencies following the pro-Brexit result.

While this led to the ensuing retail price rises in the UK, British consumers have remained buoyant. The Confederation of British Industry (CBI) noted a 5.9% increase in sales in November in the run-up to Christmas. Although Black Friday proved disappointing, fashion retailers did enjoy increased website traffic leading up to the event and were able to generate sales from bargain-hunting consumers in that period.

The likelihood is that larger fashion chains could feel the impact of Brexit – especially a 'hard' Brexit – more harshly as the EU continues to play a much bigger role in the supply chain. The nation's bargain mecca, Primark, announced that its profits would be hit by the fall in the pound but that would be largely offset by the increased margins being enjoyed by its parent company, Associated British Foods.

Meanwhile smaller artisan labels may benefit from the downward fluctuations in the pound as British-made products become more cost effective compared to those currently being imported.

On the flip side, however, smaller businesses that produce their products abroad to lower their costs or rely on imported raw materials have been hit hard as the cost of buying from EU and other internationally-based suppliers has suddenly become significantly more expensive.

Businesses based in the UK that offer consumers clothing made with raw materials from fashion capitals such as Italy have either had to negotiate better prices or take a hit on their profit margins. Such companies, which are heavily reliant on imports, will no doubt be looking at ways to offset any further hike in materials and products should future trade tariffs come into effect with EU nations.

Positive indicators for the future

Despite these longer-term concerns, Britain's economy has proved to be stronger than anticipated in the wake of voting to leave the EU, with UK GDP being upwardly revised. A rise in wages alongside stronger than forecast economic growth, lower borrowing costs and smaller unemployment numbers are all positive indicators for the future.

Along with the prospect of a continued increase in consumer spending, the rise of import costs coupled with the fall in export costs creates two additional positive scenarios for the sector.

The first is the potential for UK businesses to manufacture more products here in Britain. The High-End and Design Manufacturing Report produced two years ago by the British Fashion Council (BFC) alongside the UK Fashion and Textiles Association (UKFT), Creative Skillset (CS) and Marks & Spencer (M&S), suggested there would be a 65% increase in demand for UK made high-end products in the next five years. This type of growth on the back of demand for UK products could deliver an additional GBP400m in UK fashion industry revenues and create another 1,700 jobs.

The second scenario is that British-made products could become more popular, not just to the UK consumers who want locally sourced items, but also to those overseas who can enjoy British brands made more affordable by the more favourable exchange rate with the pound.

As we enter 2017 the outlook is good but there are also bumps in the road ahead for the UK fashion industry – such as currency volatility as markets respond to the forthcoming Brexit negotiations and other political events across Europe. Effective currency management with a smart strategy will be essential to insulate any UK fashion and textile businesses which are active in the export or import market.