"Brexit" - What Now?
The world is coming to
terms with the results of the UK’s decision to leave the EU after an often
acrimonious campaign which saw the country divided more or less evenly between
those wanting to leave and those wishing to remain.
The result (52% leave vs 48% remain) means that the UK has
decided - with the slimmest of margins - that its interests are better
served by being outside a trade bloc of some 500 million people with a GDP in
2014 of approximately USD16.8 trillion, according to the IMF.
Constitutionally, the country is in turmoil. The Prime Minister has announced his
resignation, precipitating a leadership contest within the governing party - a
contest likely to highlight the deep divisions within the party between the
Eurosceptics and the Europhiles. The
main opposition party also finds itself in a leadership contest. Scotland and Northern Ireland, which voted in
favour of remain are now in a situation where the wishes of the majority of
their populations have been overridden by those of the English and Welsh.
Whatever the arguments for and against, the UK has voted to
leave and businesses need to decide how this will impact them. The short answer is, it’s too early to
say. We have no idea how long the exit
will take, what the exit terms will involve and therefore the likely impact on
the country’s ability to trade and to attract Foreign Direct Investment
(FDI). Some businesses have said that,
in the event of Brexit, they will relocate either in full or at least partially
to the remaining EU countries. Others
have said they will remain.
Some will decide that the best chances of survival are
outside the UK and depart as soon as possible unless the incoming government
negotiates a deal that persuades them to stay.
These will mainly be larger multinationals and international companies
that invested in the UK because of its (then) EU membership. Businesses that deal with them will see
business volumes decline unless they supply components or services that can be
sourced only from the UK.
For UK businesses with little to no trade with the EU and
who don't employ other EU nationals, things will continue as before, at least for
the time being. Those who import raw
materials, other foreign components, services or staff can expect to see the
cost of these increase as sterling has fallen.
Generally, what goes down must come up and we can expect sterling to
rise again, but whether it will be to pre-referendum levels remains to be seen. This will impact profitability.
UK businesses with UK expat employees based in Europe may
find that they may be subject to new work and/or residence visa regulations,
making it more difficult for UK companies to move employees to Europe for work
in future. This could impact
competitiveness.
Those with EU nationals on their staff may find that those
employees demand higher salaries to offset the fall in sterling (assuming
they’re paid in sterling). This will
also make it more difficult to hire new EU nationals if the business depends on
it and UK regulations covering the employment of EU nationals change. Some employ casual migrant labour or
low-skilled EU labour depending on seasonal demand. They will need to know what the regulations
will be governing their ability to continue employing such labour to stay in business.
UK exporters can expect the fall of sterling to mean their
goods/services are now cheaper (and therefore more competitive). This includes businesses based outside the UK
paying UK-based employees in sterling. They
should take advantage of this now.
It also means that for foreign businesses wishing to set up
in the UK (and not dependent on its EU membership) are likely to be welcomed
with open arms. For foreign companies
that purchase UK goods/services, these will be cheaper (for a while at least)
due to sterling’s fall following the referendum result. Buy now, if you can…
Foreign companies with significant presences in the UK based
on its EU membership will have to consider other options, e.g. set up a new
subsidiary in the EU and move there, leaving the UK workforce with fewer
jobs. They won't know what the future
will be for at least two years, but they have their own home country
shareholders and governments to satisfy and may not e able to wait for things
to settle. However, if they decide to
dispose of UK investments, this may take time due to the uncertain political
situation and the fall of sterling.
Ratings agencies have already downgraded the UK’s credit
ratings, which usually means an increase in the cost of borrowing depending on
how easy the UK government finds it to finance its borrowings. Rates are
already at historic lows and there seems to have been a switch to “safe”
investments (government bonds) meaning that, for the time being, rates will
remain low. The Bank of England has just announced an interest rate drop, so businesses
which depend on bank finance will find this is cheaper, and may decide to press
on with projects that will now make more economic sense.
Until the UK formally invokes Article 50 of the Lisbon
Treaty (which apparently needs to happen before the exit process can begin) it
remains a member of the EU, albeit without a seat at the decision-making
table. It is still bound by current EU
legislation and will continue to benefit from membership. The exit process, once started, is likely to
take at least 2 years. At the same time,
the UK will need to renegotiate trade deals with other countries with whom
trade was previously covered by EU agreements.
The problem is that it’s still too early to say what will
happen. Some of the predictions of the
remainers have come true (falls in sterling and stock markets). My opinion?
Consider the worst-case scenario for your business and prepare for that. It may mean setting up an EU-based subsidiary,
but not all can afford this (especially with a lower sterling giving less bang
for their pound…)
Expect more uncertainty in the months to come.
Labels: Crisis Management, Leadership, Strategy, Teamwork
posted by William Martin @ 08:51
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