Uncertainty is the key challenge in regard to Brexit, and this uncertainty will contribute to falls in business and consumer confidence as well as delays to investment decisions. Exit negotiations will be protracted, with the UK unlikely to leave the EU before 2018.
The medium term outlook would depend very much on the terms of the exit negotiations, making it very difficult to quantify the economic impact, or indeed determine the regulations which UK business would need to adhere to. Depending on the outcome of the “divorce” negotiations, an array of threats and opportunities would exist for business.
What is the most significant impact Brexit will have on European companies?
The uncertainty that will overshadow the UK for at least the next two years is one of the major challenges for business. This will undoubtedly damage business sentiment, put downwards pressure on investment and affect consumer confidence. There will be a direct impact on sterling, and this could push up inflation. So depending on the cost base of the business this could also have a negative impact – although for UK exporters a weak currency is a boon. Strategic and operational decisions will need to be made about where businesses locate their operations. I doubt we will see a wholesale removal of operations, but a rebalancing of where (geographically) business invests is likely.
Which business segments will be most hurt by what has happened?
Much depends on the location of the cost base versus the location of the consumer base. Our industry forecast models are not showing a huge impact on consumer spending. Those categories that will be most-affected will be the discretionary items – for instance, confectionery. Staples are not driven by changes in income to the same extent. Overall we are not expecting a cataclysmic impact on consumer spending.
Will a weaker currency lead to price rises?
A weak currency is expected to put upwards pressure on prices. Whether business should pass on price rises to consumers is a difficult question. I think avoiding knee-jerk reactions and taking a calm and measured approach is crucial. Weighing up whether to pass on price rises to customers and end consumers is not a straight-forward choice, particularly at a time of weak business and consumer confidence and a fragile economic outlook. For some, absorbing the cost pressures will be the best approach.
What can business do to protect itself?
The challenge is the potential length of the negotiations and the fact that we are entering into unchartered territory – this makes it very difficult to implement effective strategies. There is an uncertain future for the UK economy for the next two years at least and there are flow-on effects to Europe as a whole. The “unknown unknowns” are a major challenge and this makes it difficult for companies to protect themselves. I think letting the dust settle, using different economic scenarios to inform strategic planning, and taking a cautious approach to investment decisions in these initial months would be wise until we see the likely direction of the negotiations.
It’s also important to remember that the UK economy is large, the consumer base has historically been strong and the business environment is competitive with a flexible labour market and well-developed infrastructure. The immediate economic outlook for the UK will be volatile with political instability a cloud on the horizon, but long-term the UK economy does also have its strengths and these should not be forgotten in the immediate aftermath of the referendum.