Any company hoping for a swift resolution of the uncertainty surrounding Brexit after the UK’s general election will have been sorely disappointed. The surprise result — which left the UK with a weakened prime minister and a hung parliament — may make a soft Brexit more likely. But planning for this is still challenging.
There are dual uncertainties facing business. “Uncertainty [around Brexit] is the first concern of British business, uncertainty about supply chains, export markets, regulatory co-operation and keeping and attracting staff — the fundamentals of their business models,” says Paul Hardy, formerly the senior EU legal adviser to the House of Commons and now Brexit director at law firm DLA Piper.
“The second is the real risk of a cliff-edge Brexit: significantly, both the UK and the EU acknowledge that no deal is a possible outcome.” The cliff-edge scenario — crashing out of the EU without new trading arrangements in place — could lead to a huge increase in administrative and financial burdens.
To combat these uncertainties, the largest companies have engaged advisers — from lawyers to human resources specialists and management consultants — to map out potential scenarios for 2019.
Consultancy PwC says it is experiencing particular demand from organisations for advice on what Brexit means for staff and workforce planning, the cost of their supply chains and their compliance with new trade and customs regulations.
The likelihood that there will be no deal is now even higher than before the election
Kevin Ellis, chairman of PwC UK, says: “Since last June we have been working with businesses on their Brexit scenarios and contingency plans. Clients are taking stock of what the hung parliament means, but the election result hasn’t led to any immediate change of direction as they wait for clarity and direction from the Brexit negotiations.”
While big business can afford the resources needed for speculative planning for a post-Brexit environment, smaller companies are less able to do so. The Institute of Directors (IoD) has suggested that the government should provide businesses with practical help to identify their exposure to Brexit, for example concerning regulation or immigration, and plan accordingly through a voucher scheme or by introducing tax relief to offset associated costs.
Many businesses, for the moment, are not doing any planning at all. Instead, faced with an uncertain future, they are sitting on their hands when it comes to investment and hiring. A recent survey of 1,200 team managers from small, mid-size and large companies in the UK found that one-third had changed their investment strategy as a result of the referendum outcome, with the vast majority saying that the change reflected an expectation of either lower growth or recession. Ten per cent expected to increase hiring, but almost 30 per cent had implemented a hiring freeze or planned to lay off staff.
Kevin Soady, partner at CNC, which carried out the research, says half of the managers surveyed had “no idea” how World Trade Organization rules — the tariffs and duties to which the UK would default if it left the EU without a deal — would affect their business.
“The results show that the uncertainty around the general election and the Brexit process overall is clearly having an effect upon the behaviour of the UK’s smaller and mid-sized companies, with very few contemplating any immediate growth or increasing hiring and with many preparing for a slowdown in business activity, scaling back on hiring and even contemplating laying people off,” he says.
Such surveys jar with recent economic data showing UK labour participation rates at record highs and the unemployment rate at a 40-year low, but reflect many economists’ fears that the current situation is a “phoney war”. The UK still remains a member of the EU, and Brexit’s potentially negative impact, they argue, will only materialise once it has actually happened.
Uncertainty is visibly dampening animal spirits in the UK economy. Although manufacturing activity and jobs growth remain strong, the economy slowed significantly at the beginning of 2017, with quarterly growth falling to 0.2 per cent in the first three months, and recent business and consumer confidence figures indicating it will face further weakness.
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Business is not doing enough to prepare for the aftermath, says Mr Hardy of DLA Piper, but it could. “Many UK businesses outside the financial services sector have yet to grasp the possible impacts of Brexit.”
He argues that, despite the uncertainty over the outcome of negotiations, companies can still take important preparatory steps. These include carrying out a Brexit impact assessment and putting in place contingency plans, such as preparing for the “worst-case” scenario that no deal would imply.
He also urges business to engage with both the EU and UK governments to ensure that the impact of Brexit on their sector is properly understood, and that transitional arrangements are in place following Brexit day.
Allie Renison, head of EU and trade policy at the IoD, says she is most worried about companies that may think they will not be affected by Brexit only to discover at the last minute that they are.
“It’s essential for all firms to firstly undertake an audit assessing what their potential exposure might be, [whether it is] employing European Economic Area nationals, being in a supply chain which sells to or imports from the EU, having clients who benefit from EU funding [or] having contracts which might be predicated on the assumption of moving goods, services, employees or capital easily between the UK and Europe,” she says.
While there is more business can do, it also expects more from government. Lobby groups have repeatedly called for a timetable for the introduction of a new immigration regime, which would allow companies to plan for hiring decisions over the next few years. This — as part of a detailed list of negotiating priorities — would at least provide the parameters within which to conduct scenario planning. Without it, companies will continue to operate in a vacuum.