Brexit – Implication on Small Businesses Part 2

Negotiations and Uncertainty

The key areas that are important to examine are:

1) Employment

Angus Amstrong stated that “those likely to be most affected by leaving the EU would be in the service sectors that trade with the EU and sectors that benefit from the free movement of labour (director of macroeconomics at the National Institute of Economic and Social Research). This means he anticipates that the financial services; tourism and car manufacturing sectors will most likely be the most affected. (https://www.theguardian.com/business/2016/jun/18/british-business-after-brexit).

 

Minimum wage

The national minimum wage is likely to remain consistent as it was a policy that was driven specifically by the UK government. The EU had no part to play in the introduction of the minimum wage; however, many are concerned that the minimum wage will continue to grow (without the same access to competitive labour or business opportunities). If your business is heavily reliant on European migrant labour then now would be a good time to utilise UK based systems such as apprenticeships and other government schemes that will allow you to achieve cost reduction with direct UK labour.

Visa requirements

There is the prospect that the UK government (post Brexit) will introduce a point’s based system. This means that no one would be allowed to work in the UK without a specific profession or skill set. It is however debatable whether such a system, if it were to be introduced, would stretch to EU residents.

It is likely that employees from the EU would require visas in order to work and stay in the country. The result is that, for example, if you run a coffee shop with a specific Italian customer base – you may start to experience a reduction in your customer base. In addition, you may lose some of the employees from Italy that offered customers an authentic experience.

The visa requirement may also mean that UK residents working abroad may be required to hold visas. This effectively means that as a sole proprietor who often works or does jobs in another European country – you will now have restrictions that may require you to forgo or adapt your operations in Europe.

Changes to legislation

The move to leave the EU is likely to come with changes in legislation that affect your business in many different ways. It is therefore important to stay ahead of any discussions papers or news that relates to your specific sector. Also consider the indirect impact that another sector may have on your sector and business.

 

2) Trade Agreements

Supply and Demand (Import – Export)

Considering the influence of the EU in our supply and demand for exports, it is logical to assume that the decision to leave will have a significant Impact. Certain goods and services may be more expensive for UK residents or businesses to acquire e.g. food, cars etc. However, this may be a short term effect especially if the UK negotiates competitive trade deals with countries outside of the EU. This also creates new opportunities for UK businesses to be innovative i.e. if you know the issues that will affect similar businesses as a direct result of leaving the EU then what stops you from providing the solution?

Imports are likely to become more expensive whilst UK exports are likely to be cheaper for other countries. Remember that this will have a different impact depending on the sector/industry your business is operating in. If your business is operating in an industry that is currently protected by the current trade agreements, then it is correct to assume that your business will be impacted heavily by the changes.

The global market place

We need not forget that there is a global market place the UK currently doesn’t have the free access to due to trade agreements with the EU. The opportunity to trade with whomever whenever has its advantages but the UK government has to do what it can to protect local industries. One of the key benefits of being part of the EU was that the UK government was not required to give too much thought to this because domestic companies were protected by virtue of being part of a single European market. As a business owner it is important for you to start observing the global opportunities that potentially lie ahead.

 

3) The Economy

What has transpired so far

It is common news that the markets reacted negatively to the news in relation to the Brexit vote. Soon after the vote was announced, the value of the pound dropped by 10% to reach its lowest figure of $1.3305 since 1985. The pound/dollar exchange rate on the 26th of July @ 17:56 was $1.31. The drop in the value of the pound was partly as a result of David Cameron announcing that he was stepping down as Prime Minister. Since then Theresa May has been appointed as the new Prime Minister.

In addition to the pound dropping, we saw a big sell-off of bank shares and house builders. A number of firms have also stated that they would be reviewing their investment in the UK. It has been advised that the minimum timescale for leaving the EU is 2 years. However, some argue that the UK will prolong the process or even forgo the decision to leave altogether.

We also saw news that other EU member states may be under pressure to execute a referendum much like the UK. This would be very damaging for the EU if it were to transpire thus it may be in the EU’s best interest to ensure the UK under performs as a non-member State. This would involve purposefully creating barriers in order to guarantee an unpleasant economic experience for the UK.

Despite leaving the EU – the US, Germany and many other countries have promised to continue their trade with the UK. It is reported that German car manufacturing companies have expressed an interest to continue their business relationship with the UK despite the vote.

 

What to expect

We may expect to see a fall in property prices; however, the extent of this will be determined by the new rules around the free movement of EU citizens. When initially writing this article we had anticipated that The Bank of England would lower the basic interest rate to 0.5%. This has now been confirmed in recent news. This means that your personal and business savings will continue to be eroded overtime. It may therefore be useful to consider on risk free investment options that can replace putting your money into a savings account.

It is also expected that the pound will continue to fall against the dollar dropping to $1.20 in 2017. Some economists expect the UK to enter into a recession – comparing it to the 2008 credit crunch. However, the credit crunch was a crisis and the Brexit vote is more of a shock. This means that in the short term we are likely to experience panic but the markets should return to normal depending on the strength of the UK economy and the strategy to move ahead in a post Brexit economic environment.

 

4) What does it all mean for small businesses?

Here are some questions you may need to ask yourself:

  • Is your business heavily reliant on EU funding?
  • Who makes up the majority of your customer base or suppliers?
  • What are the direct and indirect effects to your business, sector and industry?

From a Political, Economic, Social, Technological, Environmental (i.e. changes to environmental policies) and Legal perspectives;

Given the above, can your business survive based on its strengths, access to opportunities, awareness of weaknesses and mitigation of threats?

Conclusion

It is important to be aware of the natural short term effect of the decision to leave the EU and how it was always going to lead to a drop in the value of the pound. It is important to understand the difference between short term and long term effects in order to avoid making kneejerk decisions. It is far too early to determine the economic outlook of the UK outside of the EU with certainty. This article has not been designed to provide answers but to encourage constructive discourse around the issue.

The Brexit exit vote was important for democracy. We are often too focused on short term stability at the cost of long term prosperity. In other words, it is important not to seek stability and consistency at the expense of making the necessary changes for the long term benefit of the economy (this is not to suggest that leaving the EU was the correct decision). Often you will find that our reaction or fear to change creates more of a negative impact than the change itself. We anticipate that the process to leave the EU will be very long term, provided that the UK eventually leaves the EU. It is therefore imperative to your decision making not to be overly speculative but rather to prepare your business for possible eventualities.

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