What Brexit Means For Wart Removal (and other products and services)

There are three main points to this piece:

  1. The broad impacts of Brexit can be quantified through differences in GDP forecasts before and after the UK referendum. While there is no clear consensus among economists, there is a range.
  1. GDP revisions are not only necessary for the UK, but also for the country’s largest trading partners
  1. Revisions to GDP can easily be extrapolated to (1) average annual incomes as well as (2) reductions in spend on specific goods and services (i.e. mole removal procedures)

BREXIT’S IMPACT ON INCOMES THROUGHOUT EUROPE:

There is a ripple effect emanating from a downturn in the UK economy. The most obvious transmission avenue to surrounding countries would be reductions in trade due to weaker UK demand. Weaker demand is driven by (1) drops in the GBP relative to the foreign currency, driving up the relative cost of foreign goods or (2) a general reduction in spend on a particular good altogether.

Below, I summarize the estimated impact on consumers in the UK as well as some of the most important trading partners.

chart 1

How to read this chart: By 2020, the average UK consumer will be 2000 USD poorer as compared to a scenario where Britain voted to stay. The second largest impacts will be registered in Switzerland and Germany, with a loss in income of 400 USD and 260 USD respectively in 2020.

WHAT INCOME LOSS MEANS FOR SPENDING REDUCTION IN THE UK

While this analysis can easily be extended to any country on the list. I will illustrate the estimated impact on nine spending categories in the UK:

chart 2

How to read this chart: Average annual income in the UK is around 33,648 USD. Approximately 4.6% of this or 1,546 USD is spent on clothing and footwear every year.

Note: These spending breakdowns are sourced from the World Bank’s International Comparison Program. T&C stands for Transport and Communication. This typically includes mobile phone purchases, data plans, landlines, broadband access while transport is planes, trains and automobiles (both public and private). “Other” is a huge mess of items, but the largest category for the developed world is restaurant spending. Notably, education and medical spending as a portion of total income is much lower in the UK than in the US.

We then estimate income elasticities, which is to say, for every 1% change in income, spending on X product is reduced by X%. The technique used to estimate income elasticity here is the Florida Preference Independence model. Long story, short, the Florida PI model assumes that the preference ordering among items within one broad consumption group is not dependent on the quantities of items consumed in other groups.*

chart 3

How to read this chart: For a 1% increase in total income, the average UK consumer increases their spending on clothing and footwear by 0.96%. Notice anything strange? Discretionary spending categories like clothing and apparel have a lower sensitivity to changes in income than seemingly more important categories like medical and health. What’s going on here?

Well, in the developed world, a larger share of the medical spending is in non-life threatening procedures and preventative care. The theory is that, when faced with a reduction in income, the rich world first cuts back on cosmetic medical procedures (i.e. wart removal) as well as transport (less taxis, more buses). They may trade down to cheaper goods within food and beverage, but they are still going to eat and drink about the same amount in dollar terms.

Now we run into an obvious problem. A 1% increase in income may not be enough of dollar increase to cover all of the simultaneous increases in spending outlined above. A quick fix is a bit too proprietary and technical for this post, but it is very well-tested.**

The final step is take a look at the amount of money the average consumer pulls out of each spending category and, what that means for the relevant industry players.

chart 4

How to read this chart. The average UK consumers will spend 78 fewer dollars on clothing and footwear in 2020 than they would have if Brexit never happened. That is essentially one pair of sneakers.

chart 5

One last chart (to the left, to the left): If every consumer reduced their spend by 78 dollars, the industry will have missed out on 5.22 billion USD in potential spend that would have otherwise been there had the UK voted to stay in the EU.

So, what does this mean for wart removal and breast implants? Well to start, we would need the share of total medical spend allocated towards cosmetic surgeries, but we can be sure that the impacts to the total category will not be negligible. Industries beware.

*Let me geek out here: Consumer preferences are independent or strongly separable if the preference ordering among goods is not dependent on the quantities consumed of any other goods. This concept can be applied to broad product groups or categories and is referred to as block independence. Block independence or strong group separability implies that the preference ordering among items within one broad consumption group is not dependent on the quantities of items consumed in other groups. This assumption enables stepwise demand analysis, where in the first stage consumers allocate their incomes across broad categories of goods, like food, shelter, and entertainment.
**DM me if interested

 

 

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