Posted by Oliver Meredew on February 27th, 2017.
Without doubt, the EU Referendum (and by extension, Brexit) has been one of the most divisive events to hit the UK in modern times.
With the nation virtually split in two on how they voted and whether Brexit will be positive or negative for the UK, observers both inside and outside of the UK have been giving their views on the historic matter.
One area of particular focus has been on UK businesses – among the most doom-laden arguments of the referendum campaign were that the UK economy, and the businesses that drive it, would be severely damaged by Brexit.
In this article, we’ll be taking a look at whether these gloomy forecasts have had any credence yet, as well as what 2017 may hold for UK businesses after the Brexit process officially begins.
On the face of it, the immediate effects of the vote to leave the EU haven’t been as bad as many were expecting. UK businesses have not been cast into a bonfire of uncertainty and while the falling Pound has made it more costly for UK importers, this fact has also not prompted mass migration to the continent.
That said, we are still only in the warm-up to Brexit proper, with the exit process officially starting after Article 50 is triggered by the Government.
In what may be the calm before the storm, UK businesses and companies have been having their say on the effects of Brexit so far.
One of the most notable measures of business sentiment has been a survey from Ipsos Mori, which included opinions from over 100 top UK companies.
On the negative side, 10% confirmed that they would be moving operations out of the UK, while around 58% thought Brexit had already been damaging. 66% of companies had put contingency plans in place after the Referendum, although this has largely been a pre-emptive action against possible marketplace shifts.
More positive results to come out of the survey were that around a third of respondents saw no change after Brexit, while 11% considered it a positive influence on business.
Offering a brighter picture on long-term attitudes to Brexit, Ipsos Mori Chief Executive Ben Page stated;
‘32% of respondents said they think their business will start to feel the positive effects of leaving the EU in five years’ time…and the number of (business) captains that think it will remain a negative impact reduces to 45% when looking at [the] long range forecast’.
Looking ahead, 96% of respondents were confident that they could absorb any costs associated with leaving the EU, while over 50% saw keeping the free movement of EU skilled workers as an imperative to future successful operations.
This hasn’t been the only record of how UK businesses have been faring after the Referendum, however; the British Chambers of Commerce (BCC) has also surveyed almost 1500 of its members on the matter.
The results were more balanced than the Ipsos Mori poll, showing that about 25% saw the weak Pound triggered by Brexit as a positive for their export margins and 22% considered it a drag on exporting profitability.
Commenting on the issue was BCC Director General Adam Marshall;
‘Our research shows that the falling Pound has been a double-edged sword for many UK businesses. Nearly as many exporters say the low Pound is damaging them as benefiting them. For firms that import, it’s now more expensive, and companies may find themselves locked into contracts with suppliers and unable to be responsive to currency fluctuations’.
A notable casualty of the falling Pound has been UK company Rolls-Royce Limited, which took out long-term currency exchange contracts in the event of a weakening US Dollar, only to end up incurring a sizeable loss when the Pound fell in value instead.
One response to a weaker Pound could be to raise prices to absorb losses; around 54% of BCC respondents stated that this was an option during 2017. This came in conjunction with 44% estimating that their domestic sales would be harmed by the soft Pound.
One prevailing theme from both surveys has been uncertainty – with no clear guidelines on how Brexit negotiations will unfold or how long they will take, UK business owners have been forced to make assumptions based on what little data is available from the Government.
While this fact has handicapped UK business bodies to some extent, it hasn’t stopped them from forecasting how UK business conditions could change in 2017 and beyond.
2017 is expected to be a busy year for the UK, with the imminent trigger of Article 50 likely to cause high Pound volatility as Brexit begins in earnest.
Before the action kicks off properly, however, major bodies from across the UK have been having their say about how business conditions might change in the future, for better or for worse.
Opening with a forecast from the top, the Bank of England (BoE) agents report for February has concluded that UK business investment is likely to rise this year.
This outlook has been enforced by Magister Advisors Managing Partner Victor Basta, who has forecast that rising uncertainty about trading with the US could push traders to look to Europe for their next business partners, specifically;
‘We think the most active “European” destination will be the UK’.
The weak Pound makes it easier to buy into British businesses; whether this is a positive or negative fact is up for debate, as an international takeover can bring new opportunities but may alienate UK consumers used to dealing with ‘homegrown’ companies.
The BoE have also issued some statistics for 2017 and beyond, estimating that the UK economy will grow by 2% in 2017, 1.6% in 2018 and 1.7% in 2019. Inflation is expected to rise by 2.7% in 2018, which could put significant pressure on businesses looking to source materials or components.
While she is due to leave the BoE in June, policymaker Kristin Forbes has stated that UK interest rates could finally be hiked if inflation gets too high; this could trigger a spike in the Pound’s value.
The BoE famously cut the UK interest rate to 0.25% after the EU Referendum and since then speculation has been rife about when it could be raised again.
Another body weighing in on the future of UK business conditions has been the Confederation of British Industry (CBI), which has been focusing on the upcoming Spring Budget.
CBI Director-General Carolyn Fairbairn has highlighted the impact of a soft Pound and higher inflation;
‘These pressures risk hampering firms’ ability to deliver jobs and growth and raise productivity. Government must therefore be alive to the challenges facing firms and should take action as necessary to alleviate these pressures’.
The CBI has recommended that the Government make the UK a more attractive place for businesses during and after Brexit, although policymakers may have their work cut out for them if an agreeable separation with the EU can’t be reached.
Business rates have also been targeted by the CBI as room for improvement in the future, given that predicted rises in some areas by over 10% could make coping with higher import prices from Brexit even harder. This is especially true in the City of London, the UK’s financial heart, which is expected to see a 33% rise in business rates over the next 5 years.
The City is already facing pressure from abroad, where French companies have already been trying to ‘poach’ financial sector employees due to Brexit concerns.
Closing this section on a positive, if extremely far-reaching note, PricewaterhouseCoopers (PwC) have estimated that the UK will remain a ‘top 10’ global economy in 2015, even with the potential handicap of Brexit.
Putting a note of caution on the news was PwC Chief Economist John Hawksworth;
‘Developing successful trade and investment links with faster-growing emerging economies will be critical to achieving this [economic strength], offsetting probable weaker trade links with the EU after Brexit’.
Moving further afield now, Brexit has been a hot topic among entities from abroad, who have offered rather contrasting pictures of how UK businesses will fare in the future.
From the positive camp, Apple Chief Executive Tim Cook has expressed optimism;
‘We’re a big believer in the UK – we think you’ll be just fine. Yes, there will be bumps in the road along the way but the UK’s going to be fine’.
Apple has recently announced plans to build a new headquarters in London.
On the other end of the spectrum, Roland Berger Chief Executive Charles-Edouard Bouee has warned clients off investing in the UK at present, due to the high chances of Brexit-based volatility.
As well as recommending a cautious approach to interacting with UK businesses, Bouee has summarised the complexity by stating;
‘People are comparing it with a divorce. It’s not a divorce. There are rules in a divorce, there’s a background, lawyers, there are things that have taken place before. In this case I don’t think we have seen such a disentanglement in the last 50 years anywhere in the world’.
The European Commission (EC) has also struck a cautious note on UK conditions after Brexit, estimating that UK growth will slow over 2017 and 2018 as Brexit negotiations drag on. On the topic of business investment, the EC has estimated that ‘business investment is expected to increase only marginally’.
This comes along with an Organisation of Economic Co-operation and Development (OECD) prediction, which sees UK GDP growth dropping to 1.2% in 2017, something at great odds with favourable UK business conditions.
The OECD’s estimates of the UK economy struggling under Brexit are largely due to uncertainty about ‘the nature of the agreement the UK will eventually conclude with the EU’ and that precise agreement is worth watching out for as the UK starts its long journey out of the EU.
If it looks like the UK is going for a ‘hard and fast’ exit that forsakes ties with the EU for complete separation, then UK businesses might have to put up with a fresh storm of uncertainties. Should a more considered approach be taken, however, then the Pound might actually be strengthened on the back of the added security that could be afforded to UK businesses and those looking to invest from overseas.
Brexit is still only just beginning, so be sure to stick with the TorFX blog for the latest developments.
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