The latest Grant Thornton International Business report published today shows that many UK businesses are increasingly affected by Brexit: UK business optimism has fallen to its lowest measure since Q1 2013, down to 9%; whilst optimism remains strong across the EU and eurozone (net 47% and 57% respectively). This is affecting investment and business plans. This is not surprising given the continuing uncertainty over Brexit - we don't know what will happen on 'Brexit day' in less than 18 months. Theresa May and Jeremy Corbyn addressed the CBI conference today but neither of them said anything new on Brexit which might give business greater clarity or hope of clarity sometime soon. In this situation, businesses and other organisations have to take their destiny into their own hands and ensure they have a clear strategy and plans for Brexit.
Making sense of the Brexit negotiations – and trying to predict what may happen and when – is a pretty impossible task for those organisations – businesses, public services, and charities – who will be most affected by the outcome. There is a lot of noise. There is little clarity. So it’s important to focus on what we do know.
We know that Brexit will affect trade in services and goods; recruitment; and operations and finance. It affects your people, your customers, your supply chain, your investors – and your competitors. We know that there are broadly two possible outcomes of the Brexit negotiations (recognising that there are many variants of these):
1. No deal – a rather chaotic Brexit.
2. An orderly and smooth transition based around an agreed deal with the EU.
No deal is a distinct possibility. Agreeing a Brexit deal involves agreement in the UK government; in the UK Parliament; in and with the EU governments and EU Commission; with the European Parliament; and with some of the national Parliaments. All the stars have to be aligned to reach agreement.
An orderly transition is the declared aim of the UK government and EU. The UK Government is now much clearer on this. It remains a 50/50 probability whether – come the end of March 2019 – we have an orderly transition or a chaotic no deal. So those are the two scenarios to plan for. What do they look like?
In terms of an orderly transition, the UK has proposed a transitional period of around two years and indicated that during this period we would for all intents and purposes remain in the single market and customs union. So in effect – no change for another 2 years after the ‘exit day’ of 31 march 2019. At the end of this we can assume some sort of trading relationship which may resemble Canada’s free trade agreement with the EU – perhaps more extensive than that – but falling short of Norway’s relationship with the EU (which has most benefits of the single market but has to pay into the EU budget for these).
What does no deal look like? We know that if a deal is not reached on the future trading relationship with the EU then the default is WTO rules. WTO rules mean new tariffs for UK exports to the EU on around 90% of our exports – varying from 0% for pharmaceuticals, 1.7% on electrical machinery, 3% on soap, 10% on cars and nearly 40% on meat. WTO also means an increase in non-tariff barriers – such as technical standards and burdensome customs including an increase in bureaucracy. WTO also means more limited access to EU markets for UK services.
In a no deal scenario we can expect an initial period of chaos – with currency volatility, significant delays at ports and airports and some confusion about what rules apply. This should over time settle down to more uniform application of WTO rules. And hopefully this will be followed by some sort of UK trade agreement with the EU in the longer term.
In either scenario we can assume that the UK government will introduce a new immigration regime which does reduce the number of EU citizens working in the UK – possibly based on skills or wage thresholds. And we know that in ether scenario it will take some time for the UK to negotiate free trade agreements with 3rd countries.
We know that leaving the EU takes us out of existing EU trade agreements with 3rd countries that provide more favourable access for exporters and – to a lesser extent – services. This includes markets like South Africa, Korea and Mexico. It will have much less impact on our access to markets where there are no EU Free Trade Agreements – such as the USA, China and India.
Politics is too volatile right now to make predictions. We won’t know the full details of Brexit until very close to March 2019 – but we should have a good idea towards the end of 2018. And before that we will see how quickly things progress from divorce talks to negotiating the future relationships.
With this uncertainty the key thing is to plan – and plan for the scenario with the most change – a no deal Brexit. Last week I interviewed some of my colleagues to identify some of the practical steps they are working with their clients on to prepare for Brexit. Key points include:
- Identify your exposure and risks plus opportunities.
- Work out what you need to do and when you would need to do it – how long implementation would take and when you need to take decisions.
- Identify things you can do now that will strengthen your business whatever the outcome.
- And given this is a time of uncertainty, maintain communication with your people, suppliers, customers and investors.
Keep talking and keep planning; and know at what point you need to act regardless of whether government has reached an agreement.
What businesses need most is a more tangible indication from the Government as to where Brexit negotiations are headed. As this is unlikely to materialise in the near term, businesses should be making preparations for Brexit, including a ‘no-deal Brexit’ scenario, and building positive contingencies within that to mitigate risks and identify opportunities.