Europe Roadblock

In the previous article in this series, Zupplychain looked at the potential impact of Brexit on the mechanics of moving goods in and out of Europe and elsewhere. Our second article outlines some of the more general implications for UK SMEs.

It is reasonable to conclude that the predicted immediate and negative impact of the Brexit vote has not yet happened. Latest figures show that the British economy grew by 0.5% in the three months after the vote to leave, slower than the previous three months but up 0.2% on estimates. Indeed, the Bank of England has also raised its forecast for economic growth for 2017, though still below pre-Brexit forecasts that assumed ‘remain’. With sterling starting to regain some minor ground against both the Euro and the US Dollar, are the signs looking a lot more positive now we are six months down the line?

Possibly. However, ‘immediate’ remains the important word. Most economies are super-tankers built to survive the worst weather, not necessarily at the same cruising speed but by slowing down. The key failure in the ‘doom’ forecasts appears to be one of under-estimating the lag effect. The main negative influences of Brexit are a) inflationary impact of sterling decline; b) impact on business confidence and investment; c) impact on trade.

In this case, hedging – and a highly competitive retail marketplace – has suspended the impact of deprecation for 9 -12 months; some investment continues for 12-18 months on the basis of decisions and commitments made previously and our terms of trade will not change for 2-3 years. It is also instructive to look at two previous recessions – the last one, starting in Q3 2008 was catalysed by the liquidity crunch of August 2007 (so about 12 month’s lag). That of the early 90s (starting roughly Q1 1990) had its foundations in the end of the 80’s house price boom caused by the withdrawal of double MIRAS relief in August 1988. About 15 months. The Brexit decision was 7 months ago.

In the previous article we explored the effect of Brexit on UK companies importing and exporting from and into Europe and we concluded that the current free movement that the UK enjoys with other European member states will almost certainly come to an end. Notwithstanding that the book is not yet closed on a recession or sharp slowdown, what can we say about the further implications for UK companies once we exit Europe?

It is almost a given that there will be an element of disruption to companies in the short term. Once Article 50 is formally triggered, the UK Government will undoubtedly negotiate hard for the best deal but it will also give some indication of how the EU will respond and, most important of all, what they will accept. There is still the possibility that Europe cannot afford the economically rationale relationship with the UK for fear of encouraging other countries to renegotiate too. During this transitional period, there could be fluctuations in currency with repercussions on both buyers and sellers within the EU. It is imperative that SMEs recognise this and put contingencies in place.

During this transitional phase and before our formal exit in 2019, there is the opportunity for UK SMEs to look to other markets for both their imports and exports. It is even possible that UK companies may become more of an attractive marketplace to the Americas, Asia and Africa. The UK might in fact be actively ‘courted’ by some countries once we have our own autonomous trade policies in place. But new business in new countries is long fought and hard won – after all, EU companies fearing a decrease in trade with the UK are going to be on the same pitch. UK plc needs to be upscaling these efforts immediately, not waiting for the fog over Europe to clear.

UK SMEs and the intra-UK supply chain could also benefit when our free trade and free movement agreements with the EU come to an end. In our previous article, we outline the potential complexities post Brexit of exporting pallets to France. To reduce both costs and delays in shipping, UK companies should start to be more attractive to other UK companies as a buying solution. This ‘in-house’ effect could have positive repercussions on the UK economy and particularly on the UK’s supply chains. However, the implication for UK consumers is more inflation: companies are not currently importing what they could get in the UK because it’s more expensive to import!

As we start 2017, UK SMEs need short and long term planning based on both the threats and opportunities of a new relationship with Europe (coming quickly) and others (coming less quickly). As we hurtle towards Article 50 being triggered, Benjamin Franklin’s ‘If you fail to plan, you are planning to fail’, comes to mind.

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