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Brexit and business confidence

Nicole Sykes / May 2020

Image: Shutterstock

As UK and EU negotiators trade epistolary blows, Brexit has plunged down the priority list for British businesses. CEOs know they should be working on it. They’re certainly worrying about it. They worry that an avalanche of new trade burdens will fall just as they take their first staggering steps out of coronavirus’ shadow – or worse during the onset of the dreaded second wave. They worry that when multinational boards sit down to decide which operations are viable into the future, the UK will be higher on the list for cuts than it should be. They worry that when companies review their suppliers – whether out of a drive to be more resilient or because their normal partners have collapsed – the UK won’t be the solid bet it might once have been to win or even maintain contracts.

But the attention that once might have been paid to the meaning behind Michel Barnier’s rhetorical flourishes is now spent pouring over minute-by-minute financial projections and calculating what they mean for keeping people’s jobs on the books. The end of the transition period is 7 months away. Muddling through the next week is a win in the age of coronavirus. However, the pandemic and the UK’s looming exit from the EU Customs Union and Single Market are not isolated issues for the country’s businesses.

In an unexpected way, preparing for the UK’s departure from the EU has left some British firms marginally better able to handle coronavirus. Many companies felt the first phantoms of the pandemic’s impact when factories in East Asia failed to restart production after Chinese New Year. 49% of the UK’s manufacturers have since faced difficulties getting hold of the components they need. But many factories have also had extra shelving stuffed with stockpiles leftover from 2019’s no deal scares. This inventory has been put to use to tide them over, allowing firms that are open to eek out operations until delayed container ships finally make it to shore.

Of course, those stockpiles have now been used. And for retailers whose stock changes by the seasons and for services businesses, this safety net was not on offer. Many firms in these sectors nevertheless built up rainy day funds to prepare for no deal. They too have had to repurpose that cash to survive the more immediate crisis. So while their contingency plans might have helped them see out a little more of the epidemic, the UK’s businesses are now less prepared than ever for a cliff-edge in EU trade. Proposing firms should build stockpiles and reserves back up again in a debt-laden, cash-poor coronavirus economy starved for productive investment would elicit borderline-hysterical laughter in the nation’s boardrooms.

Coronavirus has thrown other preparations out of the window too. Companies anticipating new customs barriers from next year had engaged with brokers and freight forwarders to help with paperwork. Those quotes are destined for the bin. No one knows which of those firms will survive into 2021, nevermind what they’ll be charging. Many businesses choosing to train up customs or regulatory staff themselves have recruitment freezes in place at best, and are making redundancies at worst. New staff to fill forms are going to be a hard ask for governance teams to make of strained CFOs counting every penny.

As crisis mode does start to drain away and businesses turn to plot their way out of the wreckage left behind, the UK-EU FTA has in many ways become just one of many uncertainties. How much smaller will the economy be? When will mobility be restored? When will customer spending get back to normal? Which businesses will be lost and which will defy the odds? These questions race round the heads of CEOs in every nation. British firms that do business with Europe have a dozen more. How much red tape will they face to operate as normal? What additional costs? Will there be a deal at all?

At a time when confidence in the business community is as scarce as self-raising flour in Sainsbury’s, these extra questions aren’t helpful. But so long as companies aren’t able to dedicate time to reading thousands of tariff lines and hundreds of pages of legal text as they normally would, politicians don’t need to answer those questions in full (as helpful as that would be). The right kind of smoke signals will do. If June’s exchanges are more conciliatory and less “Dear John”, that would be a good start. Decisions on equivalence in financial services and fisheries are scheduled for next month. Ticking off some of those boxes, showing progress is possible, would go a long way towards easing the lingering fears companies just don’t have the capacity to deal with right now.

Nicole Sykes

Nicole Sykes

May 2020

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