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How will Brexit affect UK Businesses?

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After the Brexit vote, there was an immediate feeling of uncertainty as well as intense speculation about the consequences for UK business. This has continued due to there being no agreed terms on the UK deal to leave the EU as yet. Initially a political shock, the unexpected Brexit result confounded all forecasts, polls and expectations. More recently, businesses have become increasingly unsure if a deal will happen at all, much less what the terms of a potential deal might be. Predictions range from the devastation on the one hand to very little through to Brexit having a positive effect. There is also the question still floating about the possibility of a second referendum.

The unknowns

Three years after the referendum, there are still many unknowns about Brexit, which makes the impact difficult to quantify. This includes the terms of withdrawal by the UK from the EU and the future relationship the UK will have with the EU post-Brexit as well as what is expected in any transition period that may be agreed. Whether UK businesses believe that Brexit will make no difference to their business in the short term, experts have advised that all businesses must make plans to protect their business whatever the new relationship between the UK and EU ends up being. This is because Brexit will alter market access, the availability of migrant labour and product regulation.

Exports

Initially, many companies believed that as they did not export, that they would not be affected by Brexit. However, looking at company interdependence and examining possible threats to its supply chain and customers, businesses can plan ahead. Companies can be affected by their supply chain, even if only trading in the UK. They may currently have raw materials supplied from Spain or Italy, for example. When free trade between UK and EU ends on the transition to Brexit, the costs of supplies will rise. Similarly, the UK’s export business may be hit financially due to higher costs and tariffs, leading to UK businesses being less competitive in both EU and global markets.

Maintaining a competitive edge by dropping prices may be the choice of some firms, but lower profits over the long-term are hard to sustain when supplier costs are likely to rise, and tariffs begin. Experts predict a fall of between 1.5 and 3.9 per cent of GDP by 2030 with UK exports decreasing by 8.8 per cent.

Levels of uncertainty rising

A couple of months after the referendum, about one-third of UK businesses stated that Brexit was a high priority concern. For the three months to January 2019, that figure rose to half of all businesses surveyed, with roughly a quarter saying it was their top priority, more than double the result from 2016.

Falling investment and employment

UK Business executives continue to look at how sales, prices, investment and employment have been affected by Brexit since the 2016 result. Businesses are expecting a fall in both domestic and foreign sales of around three per cent as well as increased costs for labour, financing and unit costs. It has been estimated that since the referendum, investment by UK businesses has fallen by six per cent in the first two years. Employment has fallen one-and-a-half per cent in the same period. Some businesses are affected more than others, and those most affected have reported lower investment growth since the referendum.

Approximately 2.1 million European migrants work in the UK. Some are bringing in vital skills in engineering, IT, health and construction sectors whilst others are major contributors in the unskilled labour market. If these EU workers leave the UK due to Brexit, the UK will struggle to recruit to meet demand.

Recent months

A UK deal with the EU could see some of the investment currently on hold being released. However, if the UK parliament opts for a “no-deal” Brexit or for a second referendum, continuing uncertainty will likely add to business costs. When Brexit is agreed, it has been forecast that over the longer term, sales will decrease. This will lead to lower investment, employment and productivity. Already, the UK is starting to see raw material prices rise, partly as a result of the falling pound, which is raising consumer prices.

The impact of Brexit on business in the UK will depend entirely on whether negotiations between the EU and UK result in a ‘soft Brexit’, which means that the UK stays in the single market and customs union, in which case the impact on business could be relatively mild. In contrast, if a ‘hard Brexit’ comes into play, where the UK leaves the EU single market and customs union and reverts to world trade organisation rules, the costs of exporting and importing within the EU will rise and dampen economic growth.

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