Negotiating the Uncertainty of Brexit
What is Brexit and what does it mean for Business?
We have all heard about Brexit by now, but what does Brexit mean? What impact will it have on your business? In simple words Brexit is the withdrawal of the United Kingdom from the European Union.
Brexit will have an impact on most British businesses as it will impact the trade between the UK and the rest of the world, the movement of people and services, the regulations that businesses must follow to deliver a product or a service and the financial regulations. Brexit will also impact the national economic and political landscape, we have already seen a change in leadership, a snap election, high volatility in the value of the GBP and a change of the base interest rate from the Bank of England, more changes are expected as the discussions continue.
Although Brexit hasn’t happened yet, some Businesses are already facing the first difficulties due to the uncertainty of what the future agreement will be and by the volatility related to the value of the GBP.
The uncertainty is the cause of the 30% drop in net migration that the latest data from the Office for National Statistics shows (in the year to June 2017) due to foreign EU nationals being unsure if they will be allowed to work here after Brexit. The Chartered Institute of Procurement and Supply also stated that it is the cause behind the increase in the number of EU27 companies seeking to avoid UK suppliers and the supply chains across Britain and the EU that appear to be splitting apart. Steve Varley, EY’s UK chairman, has warned of a “significant and worrying deterioration in investors’ longer-term expectations of the UK’s future evolution as a Foreign Direct Investment location”, this has the potential to slow down productivity growth and decrease wages.
The GBP having plunged to a 31-year low after the referendum has had a direct impact to any company that purchases anything outside of the UK and has led to the inflation reaching its highest level in nearly six years at 3.1%. This made the Bank of England recently increase the base interest rate by 0.25%, adding to the cost of borrowing.
The UK Government and the EU negotiating teams have been negotiating a deal since the UK voted to leave the EU and the situation has been changing weekly. Some topics have been agreed upon, but the EU governments, the UK politicians and even WTO members can veto a deal if they are not satisfied. We have already seen this when the DUP delayed the approval of the first round of negotiations and the USA has said that it would refuse the Quota proposal that the EU and the UK have put forward to the WTO.
The UK has agreed to leave the EU on the 29th March 2019 and it is expected that there will be a two-year transitional deal that will have very similar arrangements than today.
Due to the huge implications of Brexit on so many areas, the chances are that your business will be impacted.
What are the expected outcomes?
Due to the complexity of the situation at hand it is impossible to say what the outcome will be, the research house Oxford Economics provided the estimates on the outcome of the Article 50 negotiations in the figure across. There has already been a wave of impacts to businesses as discussed previously, these have increased the cost of borrowing, increased the cost of recruitment and increased the cost of purchasing products from outside of the UK.
There are two main possibilities for the outcome of the current negotiations, a comprehensive free trade agreement that would facilitate trade and the movement of services, maintaining the same regulations on products to remove restrictions on imports and exports but with restrictions on the movement of people is the seems to be the most likely outcome based on the data currently available. There is however still the risk that no agreement is reached and that the UK is required to trade with the EU under WTO rules.
If both parties do manage to reach an agreement, we have identified three main areas of business that will be impacted. The first impact would be the re-introduction of border checks, leading to delays, extra admin workload and extra costs requiring extra planning to ensure security of supplies. The second major impact would be the reduced availability of labour, increasing wages, reducing output and causing strains on the availability of drivers. The third main impact would be on finances, a reduced Foreign Direct Investment (the Center for Economic Performance implies could reduce by 22%) and changes in the Base Interest Rate would make access to financing more difficult, and if the global market loses trust in the UK due to Brexit, the value of the GBP will decrease further.
What can you do to avoid hitting a wall on Brexit day?
You need to understand your exposure to these topics, how much of your supply chain depends on the European Union and its trade agreements? How many of your staff are foreign EU nationals? How will your borrowing and financing be impacted? How will a decrease in the value of the pound impact your purchases?
It is critical to understand your exposure and to engage with the relevant parties to ensure that you don’t get caught by surprise when the events unfold. You should start by engaging with your staff now, and with your suppliers and customers as a next step.
Libra is here to support your work regarding your internal (staffing) and external (supply chain) exposure, we can provide you with values of your financial risk, we can work with you to engage with your stakeholders to ensure a smooth transition, we can map out your supply chain and look at the critical points to work on and we can help you reduce your exposure with staffing. Overall, we can accompany you through the path of Brexit and ensure that your risks are understood and mitigations are triggered when required.
We have been talking with government bodies, lobby groups, our clients and our business contacts to understand trends in business and expectations in our Government’s focus. Our expertise and experience makes us the ideal partner to work with you to make sure that you are not caught out.