Hat, Coat, Brexit

Three months after the vote for Brexit, there seems to be a queue of politicians and business leaders eager to point out that not a lot has changed, so what were we all worried about?

The effects of Brexit will not be measured in a few months.  They will become noticeable by the start of 2017 and will rumble on for years, probably tens of years.  Trade agreements will be negotiated.  The form they take may dominate future headlines, but in reality these are a sideshow.  Willing buyers will always be connected with willing sellers in some form, and prices and duty rates will dictate commercial viability.

The real damage is already happening, but it will take some time for the effects to show.  Of particular concern are:

  • Financial Services – The UK is a service economy (78% of GDP), and financial services are a huge part of our exports (net £60bn). The City of London is the financial capital of the World at the moment, a situation that’s unlikely to continue indefinitely when London is outside the EU and Frankfurt is at the heart of it. The transition will not be immediate, but Frankfurt will eclipse London on a 10-20 year timeframe, with New York the global centre.   Over 500 banks have offices in London for easy access to the City, but how many will remain when New York is the global financial centre?
  • Weak currency – Over the coming months, an effective devaluation of sterling against the Dollar and Euro of around 10% will feed through into import costs; most companies have covered their short term currency exposure and bunkered their fuel, but when FX contracts are consumed and the stockpiles dwindle, there’ll be a matching rise in imported goods and raw material costs. So be prepared for your phone, travel and clothing to rise, along with imported food.  We import most of our fuel and the OPEC agreement currently being concluded will restrict supply – both of these factors will lead to a considerable fuel (and therefore goods transport) price rises next year.  So expect inflation to rise, and hence mortgage rates.  A much vaunted return of British manufacturing will not help much either – most manufacturers rely on imported raw material and/or manufacturing machinery.
  • Global Manufacturers – One of the major reasons companies like Toyota and Nissan opened manufacturing plants in the UK was easy access to Europe. Now, if they contemplate expanding their manufacturing operations in Europe, where should they invest?  In the UK, with uncertain access to the EU market or in Poland?
  • European HQs – And what of US, Chinese or Indian companies wanting to expand their businesses into Europe, where should they establish their Headquarters? And for companies who’ve already opened their HQs in the UK – many of those will be discussing contingency plans to move back into the larger, single market.  And countries like Ireland, Luxemburg and Lichtenstein with favourable corporation tax schemes will be offering all sorts of incentives to relocate.  Yes, the cut in UK Corporation tax rates will help, but then the lost revenue will have to be recovered from somewhere.
  • Stability and Business Confidence – All businesses like a stable environment – it makes trading less risky and easier to forecast. Since no-one can predict what a post-Brexit Britain will look like, companies will pull back from investment and expansion, look to cut costs and conserve their resources.

So to summarise, expect higher inflation, the currency to continue to weaken against the Euro and US Dollar, unemployment to rise, taxes to rise, and more government spending cuts as it tries to balance the books.  So where does that leave businesses in the UK?

The government is very keen for us to export more, but frankly I don’t think companies have been waiting to be told.  But this is a good time to have a hard look at your business and outline some ideas for the future.  It may be worth establishing a subsidiary within the EU (Ireland anyone?) to keep a foot in the single market, and to have a look your supply chain.  Making in Eastern Europe may have been a good idea while we’re in the EU, but if goods are subjected to new tariffs, then perhaps Turkey and Morocco are more attractive.  And if you’re sourcing mainly in USD, then building sales in USD is a great way of offsetting currency risk.  If you already have an e-commerce presence, then expanding this to include the US is relatively low cost.  Plus your prices will now look 10% cheaper.   Depending on where you sell to, it may be worth holding some stock within the EU, especially if you’re making there in the first place.  Belgium and Holland are popular choices here.

Finally, are your systems ready for Brexit?  Will they support multiple companies, VAT registrations in different countries, multiple warehouses holding stock at different costs, flexible costings for whatever new duties and tariffs are required?  Our STYLEman systems will cater for this and more, and you can rest assured that whatever changes in legislation and trade patterns are needed, STYLEman will cater for it.  More details at styleman.com or call +44 116 291 6666.