The U.K. and European Union negotiators are racing against time to reach an agreement on the first three issues that have been under discussion since Brexit negotiations started in Brussels on June 19: citizens' rights, the Irish border, and the financial settlement.
But over the long term, it is the issue of EU citizens' rights that risks hurting the U.K. economy the most, and investors should keep a close eye on it.
Various U.K. media reports say an agreement is likely to be reached in three weeks, just in time for talks to move on the hot issue of trade at an EU summit in mid-December. Officials quoted by the Financial Times put the chances of that happening at "better than even," whereas Bloomberg quotes a senior European official as estimating a 75% chance of success.
Even if there is agreement on these three issues, the Brexit vote and the way the government approached the result might have dealt a heavy blow to the U.K. economy.
The vote was mainly about immigration, with Leave voters' main gripe being the government's inability to control the number of people coming from other EU countries, especially from Eastern European states, to find work in Britain.
Even with unemployment at record lows, some people believed the EU citizens were occupying jobs that could have been taken by the British. The atmosphere quickly turned quite hostile toward some EU citizens, and they have started to leave the country over the past year. Those who are still choosing to move to Britain are not coming in the numbers they did before the vote.
But if anything, the country needs more, not fewer, immigrants, especially in the highly skilled sectors, to maintain its rate of economic growth. Britain has not yet left the EU and it is being outranked already by many other countries when it comes to attracting, retaining and developing the talent that companies need to create long-term value.
The Institute for Management Development, based in Lausanne, Switzerland, published its 2017 IMD World Talent Rankings on Tuesday, and the U.K. is not in the top 10 countries -- indeed, it ranks 21st overall compared with 17th in 2014. The Institute ranks countries in terms of their ability to attract talent by looking at three factors: investment and development, appeal, and readiness.
Digging deeper into the data, the damage that Brexit already is doing becomes obvious. On the "investment and development" criterion -- investing and developing homegrown talent -- the U.K. ranks 37th, behind countries such as Ukraine, Croatia, Greece or Poland.
The U.K. position is "saved" by the other two criteria: readiness, or the availability of skills and competencies in the talent pool (it ranks 20th on this criterion), and appeal, which is the ability of the country to tap into the overseas talent pool, where the U.K. registers its highest rank, at 19th place.
But Brexit seems to have hurt this last criterion even before the referendum. Britain's ranking in terms of appeal plunged from the eighth place in 2014 and 2015 to 16th in 2016; the pre-referendum campaign, which often vilified European Union citizens, might have had something to do with this.
Over the long term, an exodus of talent could damage the U.K. economy. Britain is simply no longer that attractive for highly skilled migrants as it was before the Brexit vote, and to offset the effect of this talent drain, the government should invest heavily in training the domestic workforce in order to add to the local talent pool.
But developing this pool of talent does not come quickly and it certainly does not come cheap. With an aging population eager to maintain benefits such as inflation-linked state pensions and a swelling public debt, it is not clear that the government's priority will be to invest in training.
Companies will need to deal with extra costs imposed by leaving the EU, so in the first few years after departure they probably will not be able to invest much in training, either. Therefore, shortages of highly skilled labor seriously could affect U.K. companies' earnings prospects.
For investors wondering what countries have made the top 10 in the IMD World Talent Rankings, they are: Switzerland, Denmark, Belgium, Austria, Finland, the Netherlands, Norway, Germany, Sweden and Luxembourg. The U.S. ranks 16th.