For months, businesses, consumers and authorities in both the UK and the EU have been waiting for the triggering of Article 50, which initiates the Brexit procedure. However, the lack of details due to the mantra “no negotiation without notification,” means that uncertainty has likely been the most mulled over word in media right now.
Tomorrow is the due date for the UK to initiate the process, and the impact will be both immediate and long term, with lengthy negotiations to take place on the back of already what seems lengthy planning time. Finance Monthly has this week heard from numerous sources across the UK, from experts and specialists in several sectors, to businesses forecasting the opportunities and risks, on what might be once Article 50 is officially triggered. Here’s Your Thoughts.
Markus Kuger, Senior Economist, Dun & Bradstreet:
Theresa May’s plans to start Britain’s withdrawal process from the EU will set off a series of tough negotiations. The complexity of Brexit poses unique challenges, with overall sentiment and fiscal numbers continuing to paint a mixed picture: although forward-looking indicators are still reasonably strong, they have deteriorated since the start of the year and, simultaneously, inflation has registered its highest reading since Q3 2013. In this vein, it’s far too early to realistically assess the potential political and economic impact of Brexit – a real bone of contention will be the controversial departure bill, which may well see the UK pay in excess of £60 billion to officially leave the EU. With negotiations about future EU-UK trade relations expected to take longer than the two years available, it is likely that an interim agreement will have to be struck, and we do not expect full independence to be secured until the 2020s at the earliest.
The public’s interest will focus on what kind of deal Theresa May can strike with the EU, especially as the President of the European Commission, Jean Claude Juncker, has reinforced his position that the UK will not be able to ‘have their cake and eat it’. The EU still seems to have the upper hand in the upcoming negotiations, but a disorderly Brexit would also hurt the remaining 27 members of the bloc (although not as badly as the UK). From an economic perspective, the UK is actually performing just as well as it has done since before the country voted to leave the EU, but it’s unlikely that this strong growth will continue throughout 2017. Politically, events in Europe over the next few months could have an impact on negotiations; elections in France and Germany, should they unexpectedly go the way of anti-EU parties, will likely destabilise the two powerhouses’ control over the European bloc. For now, the priority is to start developing official plans for the UK’s departure from the EU. Businesses must monitor the uncertain and fluctuating economic situation that is to be expected over the next few years, and mitigate risks as best they can.
Mark Billige, Managing Partner, Simon-Kucher & Partners:
After the referendum, we have already seen a notable impact on prices, with the inflation rate before the vote hovering just above 0% but now nearing 2%, the official target rate of inflation in the UK. More price rises are imminent with Article 50 being triggered.
Research by Simon-Kucher shows that the severity of price increases passed to consumers has been gradually rising since the referendum. This means that as we move closer to the point at which Theresa May looks like she will trigger Article 50 at the end of this month, companies look set to pull the trigger on increasingly significant price hikes.
But businesses need to be careful. For instance, a survey conducted by Simon-Kucher shows that level of concern about price increases resulting from Brexit does vary within the UK, with 97% of Remain voters concerned about price increases, versus 57% of Leave voters. The research also shows that holidays and grocery bills are feared as the most likely culprits to face price increases. Many people, especially those who support Leave, take a dim view of companies attributing price rises to Brexit.
Chris Baker, Manging Director, UK Enterprise, Concur:
I think businesses have been pretty clear right from the outset about the deal they want with the EU once we’re officially no longer part of the ‘club.’ What will be interesting is how corporate behaviour changes over the course of the next couple of years. We already know from reports that many are stockpiling cash rather than investing, but a new development is also emerging. Many of our customers are reviewing their supplier strategy with a view to forming partnerships with UK companies in order to reduce Brexit risk and turbulence from the FX markets.
Such a strategy makes sound business sense, but longer term if the UK withdraws into itself commercially it will be much harder to forge trade agreements with China, India, the US and of course the EU. To get the best deal we have to be seen as a global economic force, not an island. Businesses need tangible incentives that will give them confidence to invest both in the UK and abroad.
Michelle McGrade, Chief Investment Officer, TD Direct Investing:
Rising employment continues to propel the Eurozone region towards 2% growth. Add in inflation and operational gearing, and growth at a company level starts to look interesting. There are some selected good structural growth stories across Europe. No one knows how key political events are going to transpire, and what the stock markets’ reaction to those events, or indeed the effect on the euro, will be. As investors, it is better to stick to what you do know and focus on a long-term investment horizon.
Rob Halliday-Stein, Managing Director & Founder, BullionByPost:
We’ve got a lot of uncertainty at the moment and when you look at things and people tend to see gold as a good thing to hold during those times and if you look at Brexit, for example, even though it has not actually happened yet, that could still have a big impact as far as business is concerned. Our most profitable times are always during times of uncertainty.
As a business, somewhat sadly, we always tend to do well at times like that. No one really knows how this Brexit is going to play out over the next two years once Theresa May pulls the trigger to trigger article 50. There are a lot of unanswered questions and a long road to go down. We don’t yet know what is going to happen to UK and EU nationals working and living abroad and those from other European countries that are living and working here in the UK. Indeed, as part of our business, we do employ a few EU nationals so the future for them is somewhat uncertain.
And then there’s the bill for leaving the EU and the estimates are that that could come to around £50bn for our share of liabilities. What will happen to the EU laws that we have been bound by for more than 40 years? Are there similar bills going to have to be rushed through parliament? Theresa May is really going to have to tread carefully here to get the best deal for us upon leaving the EU – otherwise this could end up costing the country dearly.
For me balance of payments is a big issue for then UK right now. We need to be selling more goods and services than those that are bought in from elsewhere. The UK’s 2016 international trade statistics released this month show the deficit of Britain’s balance of payments increased by nearly £10 billion, and is currently just short of £40 billion. This is something that simply needs to be addressed when we go it alone.
However, this is all good for business. With all the uncertainty in the world people still know there’s a very strong case for holding gold as part of their portfolio. It will, at the very least, keep its value and preserve wealth. It may spike much higher than that at points of crisis and then it tends to bounce back a bit.
Mark O’Halloran, Coffin Mew:
Over the next two years the ‘Great Repeal’ will become as a common a phrase as ‘Brexit’ has been in the last two. But Great Repeal Bill is misleading as the government’s key task will be enacting legislation, not getting rid of it.
The adoption of EU legislation is not going to be a smooth process. It is going to be complicated by an expectation that negotiations between the UK, the EU and its member states won’t reach resolution till near the end of the two years, potentially leading to a mad rush to get laws adopted.
Patent law is a prime example of an area that is going to be of shared concern for many areas of UK industry going forward. The Government still appears eager to move forward with both a unified European patent court and a unified European patent, and there is logic for this. British businesses will want the security of knowing that their patents are protected as widely as possible, without the hassle of having to prepare and file applications in multiple countries.
As it is, it is far more expensive to protect designs through patents in Europe than in the US and the new unified European patent court and a unified European patent is aimed to address this. The price we may need to pay, however, is continued EU political influence through, perhaps, the involvement of the ECJ. Despite Brexiteer assurances, we will not be able to have all our cake and eat every morsel of it.
There is much uncertainty in how the extraordinary challenge of Brexit will be handled; and two years for global events to take unexpected turns. At first, don’t expect all that much to change. Theresa May’s Government will be closely watched and scrutinised over the next two years and their remit will be to simply ensure we have working legislation in place for us officially leaving. It is once this formal process is complete that the fireworks will fly.
Owain Walters, CEO, Frontierpay:
We expect to see some initial volatility or “noise” in the market once Article 50 is triggered at the end of the month, however, there won’t be any significant developments until we learn more about the detail of the negotiations and any deals become clearer. Our advice to businesses is that they take advantage of the remaining two years in which we will have access to the single market to prepare for life outside of the EU. Laying the necessary groundwork to ensure that they have access to international markets and currencies upon our departure is the best way for businesses to ensure that they are successful post-Brexit.
Alex Edwards, Head of the dealing desk, OFX:
When Article 50 is triggered, it will doubtless have an economic impact. But although the currency market is often the first to react to political developments, we’re unlikely to any significant moves on the day itself.
When the Prime Minister first announced that she would trigger Article 50 on 29th March, the pound was quick to fall against the US dollar. In the end, this was only a minor blip in sterling’s recent gains – on the whole, traders have been focusing on positive economic data from the UK, along with rising headline inflation and a hawkish stance from the Bank of England.
Investors know that Article 50 is coming, and to a point, the market has already priced in a lot of the potential negatives that could arise around the coming Brexit negotiations.
In the longer term, the strength or weakness of the pound will largely depend on the progress of EU negotiations, rather than monetary policy. If negotiations are seen to be going well for the UK, then this will undoubtedly be positive for sterling, particularly against the euro. If they are perceived to benefit both the UK and EU, then this will still be favourable for the pound, as it would bring some certainty to the market. After all, it’s traditionally political and economic certainty that’s good for a country’s currency.
Failed negotiations, you won’t be surprised to hear, will not be positive for the pound. Any negotiations will also need to be voted on, certainly on the European side, and possibly in Parliament here. Like any vote, if we know it’s going to be tight, this creates uncertainty – not good for either the pound, or the euro. On the other hand, if the outcome is predictable, then the market reaction will likely be mild when the deal is passed, perhaps even supportive for the pound, as investors buy the fact rather than the rumour.
Overall though, there are still many unanswered questions about what shape these negotiations will take. It’s uncertain, and we know what uncertainty means for a currency. We’re already seeing this affecting exchange rates – the pound has been at historic lows since the Brexit vote, and has been under and close to 1.20 against the US dollar for some time.
When Brexit negotiations begin, clarity should start to be restored. As such, there may be some positive surprises in store for the pound over the next two years – the risk, as they say, could well be to the upside.
Robert Hannah, COO, Grant Thornton UK LLP:
More than nine months after the referendum result, the lion’s share of the government’s and the media’s attention is still being granted to big business brands. However, we know that mid-sized and smaller businesses are the strongest growing sections of the business world and form the backbone of Britain’s economy as significant employers and economic contributors, with strong growth projections.
Brexit should be seen as an opportunity for these businesses to open up to new, more competitive, markets and the catalyst for exploring how we unlock overseas opportunities beyond the EU.
Seeking out areas where good practice is already in place and learning from it, is key to this. A good example is Scotch whisky, a leading UK export enjoyed globally worth £4bn a year. The sector has had an excellent champion in the Scotch Whisky Association, who work hard to ensure fair access across all markets and the industry, and has built an enviable distribution network throughout the globe.
If the British government is serious about getting match fit for the new global economy, they could do a lot worse than sitting down for a dram with Scottish whisky producers to understand how we can get our mid-sized and smaller businesses set up for success.
Rob Douglas, VP of UK and Ireland, Adaptive Insights:
Although the triggering of Article 50 was arguably inevitable it is still likely to cause fluctuation on the global markets and businesses need to be prepared. At the very least, businesses are at risk of the impact of currency fluctuations, but they also face years of negotiations and debates, the outcome of which will have a knock-on effect on finances.
Above all else it is important for finance teams to carve out a degree of stability for their business. The best way to do this is to take an active approach to planning and ensure that they are as agile as possible to respond to wider economic changes. For example, ‘what if’ scenarios that model currency changes can give the finance team and business greater insight into where they may see hikes in costs, which, if not adequately prepared for, could be fatal to a business.
What’s more, finance teams also need to be sure they are considering the entirety of the business. For example, business drivers are not exclusively financial. Non-financial KPIs need to be worked into models if the team is to get an accurate view of the business both now and how it will fair in differing economic environments.
Article 50 undoubtedly spells a volatile time ahead for the UK business community, but successful corporate performance will depend on ensuring the business is as agile as possible. A finance team needs to have its hands on all the business levers, understanding how it can respond to changing market conditions to preserve–and even enhance–the health of the business. Done in the right way, a finance team will cushion its business when times are bad and make it thrive when times are good. It is only with an accurate view of the business, being prepared and predicting possible threats and opportunities, as well as modelling these across the whole enterprise, that a finance team can truly steady the ship in the tumultuous post-Brexit world.
James Roberts, Director, Sanctuary Bathrooms:
As an independent business owner who deals internationally and domestically, we’ve seen rising costs from suppliers since the announcement of the Brexit vote. The rise has been on average around 7%, but as the dollar and euro start to level out, this should hopefully reduce. This has impacted UK consumers, as we’ve unfortunately had to factor this increase into our prices.
One unseen benefit of this upheaval has been an increase in orders from other EU countries, who are taking advantage of the weak pound to grab themselves a bargain.
Frustratingly, we’re still in the dark in regards to the full impact of Brexit, but early indicators are a mixture of positive and negative. It’s difficulty to say with any certainty what post-Brexit Britain will look like as it’s uncharted territory.
Before the referendum last June, many economists produced gloomy forecasts which have since been proved wrong. Consumers’ confidence has not suffered, and, by and large, things have gone on as before. Personally, we are quietly confident that our business may benefit from a boost in EU orders in the near future which will sufficiently counter any losses in sales domestically.
When the UK Government triggers Article 50 there will be no immediate changes in law or treaties; therefore a trigger of Article 50 will not in itself have any economic effect. Markets may experience some movement, but there will be no immediate effects as the United Kingdom remains part of the EU until it leaves.
Once triggered, the UK will have two years to agree not only the exit terms but also the principles for future relations between the EU and the UK. When one considers the vast array of issues to be thought through and covered, bearing in mind that we have a history of some 40 years of integration, and that major issues such as financial passporting and access rules for UK and EU citizens (both ways) are but the tip of a huge iceberg, it is not surprising that many are of the view that there is not much chance of negotiations concluding in two years.
Two years from the trigger of Article 50 the EU treaties will cease to apply, unless that period is extended by the European Council with the agreement of all 27 other member states.
If no Free Trade Agreement (FTA) is agreed and two years expire without extension, because the UK is a member of the World Trade Organisation (WTO), the EU will treat the UK as it does other WTO members, such as Brazil, Russia or the USA. The same EU tariffs will have to apply to the UK because it will be illegal, absent an FTA, not to do so.
Given the volume of UK/EU commerce, this fallback position will not be welcomed by either side.
Ultimately, because nothing happens immediately and because nobody knows what the outcome of negotiations will be as no country has previously triggered Article 50, the only certainty over the coming 2-3 years is that there will be uncertainty.
This is problematic for those making key investment decisions, as well as in terms of important choices that need to be taken by individuals and companies whose lives and business are entirely intertwined with the EU.
So, can big business afford to wait? Absent some clear indications on key issues, it is likely that businesses will need to anticipate the prospect of trade between the UK and the EU not remaining as easy as it is now. If moving certain functions to another EU location now resolves that issue, then why would such a step not be taken? Of course it may prove to be an unnecessary step, but the risk of not acting may not be acceptable. The decision will of course depend upon a company’s particular trade and issues.
Further, companies are aware that it is unlikely the 27 other member states will make negotiations easy for the UK as they do not wish to encourage any other countries to leave. They may also want to attract as much business as they can from the UK to their own states and play on the uncertainty that will exist.
As regards rushing into new treaties with non-EU countries such as the USA and China, the EU has made is quite clear the UK cannot do so until it has left the EU, creating a potentially longer period of uncertainty before treaties with our key trading nations can be agreed.
It is therefore quite likely that if Brexit does prove to be of benefit to the long-term interests of the UK, it is unlikely that the short-term unavoidable and inevitable uncertainty affecting so many key critical issues will not have a real and negative short-term impact on the UK economy. Put another way, it would be quite surprising if it did not.
The government and the Bank of England will have to act carefully and decisively to ensure that they make the UK a seriously attractive place to do business to counteract the uncertainty that will exist.
Gary McIndoe, Latitude Law:
When assessing a business’s needs from an immigration perspective, Brexit creates the potential to incur real financial burden. Changes to existing practices need to be identified and managed as soon as possible, both to minimise costs and to streamline processes (and perhaps even achieve financial savings). As a starting point, business should assess their exposure to the impact of Brexit – some businesses will employ a far higher proportion of migrant workers than others, particularly if in a sector such as construction, hospitality or manufacturing. Review your workforce now and determine what proportion of current employees might be affected. Your business can take steps now to calculate and secure staff retention.
The next step should be to limit the immediate damage – we do not know whether the UK government will guarantee the rights of EU workers already in the UK, but we can be reasonably confident that some sort of provision will be made for those who already have employment, particularly if long-term. Speak to your existing workforce about their feelings towards Brexit, they might need guidance on securing their position. Employers can run workshops for staff members to discuss their eligibility for securing confirmation of residence rights. While this can incur an initial financial outlay, staff retention rates may benefit from a proactive approach. Many EU nationals do not hold a UK-issued residence card, but it would be a good idea to apply for one now. In some cases, a permanent right of residence can be confirmed immediately, but for those who do not satisfy those requirements, a time-limited card from the UK government is likely to give the best protection and offer a level of reassurance for employer and employee alike.
Once you have secured your current workforce, you should consider future recruitment needs, including where your staff are currently recruited from and how might the end of ‘free movement’ affect your hiring strategy. Depending on the scheme on which the government chooses for future EU migration, large-scale recruitment from specific countries may become costlier and more complicated. Familiarise yourself with the schemes applicable to non-EU migrants; formal sponsorship might never be a requirement for EU nationals, but knowledge of more flexible measures both past (such as the Seasonal Agricultural Workers Scheme) and present (e.g. Tier 5 Temporary Workers) could be of use to your business as Brexit negotiations continue.
Finally, you need to prepare your HR team. This will depend on the measures introduced when Brexit takes effect, but your HR team’s processes need to be checked to avoid illegal working may need to change. Consider reviewing your personnel files now to update ID documents and best protect yourself from illegal working penalties in years to come. Future document requirements for EU nationals are not yet known, but reintroducing document checks (or re-familiarising your team with the requirements) at an early stage might help you to transition to a more robust system required from 2019, and save costly penalties in future.
Declan Harrington, Financial Advisor, Savage Silk:
We expect that the economic and social effects of Brexit won’t become completely clear for at least six years. During this period of adjustment, we believe that the majority of companies and even individuals will see very few significant changes in their circumstances.
The only certainty is that fruitful financial opportunities will still exist once Article 50 has been triggered, and businesses should not use Brexit as an excuse to shy away from jumping on them. We are already working with companies and individuals to help them identify these opportunities and take advantage of very benign investment and credit conditions.
We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!