After 43 years of EU membership, UK has decided to leave the European Union. Here we look at how the markets and sterling have reacted to Brexit and what it could all mean for your business…
Uncertainty over the outcome of EU Referendum has had a huge impact on business confidence, resulting in companies pulling back on investments. According to the Financial Times, Britain’s global merger and acquisition activity has reached a record low, with the volume of deals down to 70 per cent this year compared with the same period in 2015.
Now as Britain has voted for Brexit, for many businesses it will be a ‘wait and see’ approach as the withdrawal process could take two years or longer. While the UK is negotiating its exit terms including its access to the internal market and trading relationship with non-EU countries, there won’t be any immediate changes – however the unknown could still affect business confidence. Here we look at the key areas of Brexit that could impact on your business…
The EU is a single market with no tariffs on imports and exports between member states. As trade with the EU accounts for 44 per centof UK exports, for some businesses, Brexit would lead to substantial costs, affecting business performance. Consequently, businesses who trade within the EU will start putting pressure on government to negotiate a business-friendly deal with minimal impact on their day-to-day operations.
This will be the case for many manufacturers that rely heavily on exporting and have been already hit by uncertainty in the run-up to the referendum. With many UK companies having suppliers and customers in the EU, Brexit is likely to affect their supply chains, that is if the negotiations result in additional levels of complexity for delivery.
A study by Open Europe found that the worst-case Brexit scenario is that the UK economy loses 2.2 per cent of its total GDP by 2030. However, it says that GDP could rise by 1.6 per cent if the UK is to negotiate a free trade deal with Europe and develop relationships with non-EU countries, including United States, China, Japan, Australia and India.
With the Vote Leave, the value to sterling fell sharply, down 10 per cent to its lowest level since 1985. This is likely to affect the cost of buying goods and services from other countries. On the other hand, goods being sold to other countries will become cheaper for the buyers.
According to Dr Adam Marshall, acting director general at British Chamber of Commerce, “businesses need action to maintain economic stability, a timeline for exit, and answers to their many practical, real-world questions about doing business during and after this historic transition.” Otherwise, with no clear plan of action, investors will opt for the currency that is perceived as safe like the Swiss franc, the Japanese yen, the U.S. dollar, making UK less competitive and impacting on the economy.
According to cityam.com, around £6bn of investment in the UK economy has been delayed due to the EU referendum. Around half of the delayed investment has been in IT projects, a further £2bn has been lost by manufacturers delaying big spending on plant and equipment, with another £1bn delayed from property and buildings.
Long term, the economy is likely to improve. The global economic backdrop has been challenging for a while, regardless of Britain’s membership of the EU. According to Woodford Investment Management, UK economy won’t be influenced significantly by today’s outcome. Despite the initial turmoil and period of uncertainty, investors will focus on the long-term opportunities and Britain could still become a supercharged economy.
According to Angus Armstrong, director of macroeconomics at the National Institute of Economic and Social Research, service sectors that trade with the EU and sectors that benefit from the free movement of labour will be the most affected by Brexit. Consequently, labour costs could rise if the free movement of EU workers is affected following the Brexit.
Nonetheless, it is unlikely there will be widespread changes to existing employment laws because such changes would lead to confusion for both employers and employees. Furthermore, some UK employment rights including discrimination or part time and fixed term workers have become so fundamentally engrained in workplace cultures that any change would be highly unwelcome.
There is no doubt UK withdrawal will have a significant impact on SMEs, particularly those who do business with the EU, preventing them to make any decision until the situation is stable. However, Carolyn Fairbairn, the CBI’s director general, said many businesses “are used to dealing with challenge and change and we should be confident they will adapt”.