Procurement Leaders

Beyond Brexit

For once, economists got it right: forecasts of a sterling crash, a sharp slowdown in growth and problems in the property market in the wake of UK voting to leave the European Union came true.


Maybe for that reason, the business community in the UK, as well as across the rest of Europe and North America, was broadly united in wanting the UK to stay in the EU. Financial markets had bet heavily on a remain vote.


So, in the early hours of 24 June, when news of the leave campaign’s victory began to emerge, the impact was immediate. Sterling’s exchange rate against its main trading partners dropped 6.8% the day after the vote and was down 9.1% by mid-July.


Assuming that sterling remains undervalued – and most analysts believe it will – this will result in higher prices for dollar-priced commodities and in semi-manufactured products from Europe and Asia.


The vote has had a hugely negative impact on business confidence, a key determinant for future decisions on investment and spending.

 

One week after the vote, a Credit Suisse poll of executives showed that corporate sentiment had “deteriorated out of all recognition” since 23 June.


For the first time since 2013, more companies said they expected to reduce, rather than increase, spending. Two-thirds of respondents suggested they would postpone or reduce spending in the UK in the next six months. This will seriously affect companies’ supply chains.


More than four-fifths of FTSE 350 directors surveyed by Deloitte said they would reduce spending, and the same share said they would slow down recruitment. Procurement executives have suddenly been tasked with managing decline.


Jonny Michael, chief executive of JMCL Consulting, says the main impact, even for those who suspected the leave campaign might win, is uncertainty. Businesses have frozen investment and recruitment while they see how Brexit pans out, he says.


However, he also points out that they cannot stand still, especially as inflation is likely to rise with sterling weak against both the dollar and the euro. Currency is one obvious tactic, as is a focus on UK-based suppliers who will suddenly look 10% cheaper than their rivals.


Brexit will force some companies to look at the indirect inputs they buy in, but that are often only reviewed every few years, if ever, such as marketing and IT. “Any period of change and uncertainty brings opportunities as well as risks, and procurement must try to grab these,” says Michael.


‘Brexit means Brexit’


After weeks of confusion, the UK has a new prime minister, Theresa May, but businesses still have more questions than answers.


May, who had been part of the remain campaign, encapsulated her policy in a three-word soundbite: “Brexit means Brexit.”


While this may reassure the prime minister’s pro-leave cabinet colleagues that she will not attempt to backtrack, it fails to answer the specific concerns of global-facing executives.


Such concerns mean that forecasting is nigh on impossible for many businesses. Brexit supporters say UK companies will benefit in the long term from trade free of EU regulation and from improved access to other markets, once the UK is able to sign bilateral trade deals with other nations.


However, Brexit supporters, also seek other goals that will be difficult to achieve: they want full access to the EU’s free market, total sovereignty and controls on immigration.

 

These are not compatible and how this will be resolved is an uncertainty for businesses.


Richard Portes, economics professor at London Business School and president of the Centre for Economic Policy Research, says it comes down to a trade-off between trade and migration.


At the heart of the debate is access to the European single market, the barrier-free zone for trade of goods that has made cross- European procurement relatively seamless.


“Europe is saying: ‘If you want to stay in the single market and benefit from these deals, you’ve got to keep your borders open to labour coming in from the rest of the EU’,” says Portes.


It seems unlikely the EU will be prepared to offer the UK the ability to restrict migration unilaterally, while retaining full access to the single market. One credible alternative is for the UK to stay within the European Economic Area (EEA) as Norway does. To assuage proleave campaigners, Brexit secretary David Davis will seek to use the flexibility over migration already allowed for in the EEA agreement, or negotiate additional protocols to make additional UK controls over migration
more explicit.


Deal or no deal?


The EU is unlikely to allow this option, dubbed EEA-minus or a ‘Flexcit’, even though Switzerland has a similar relationship with the EU, governed by 120 separate agreements.

 

However, Brussels is furious with Switzerland’s decision to impose migrant quotas as of February 2017 following a referendum in 2014. As a result, the EU will be highly unlikely to sanction a similar deal with the UK.


The odds are that the UK will end the twoyear period ordained under the Article 50 exit process by leaving the EU with no trade agreement in place – a so-called “hard Brexit”. This also means that it will no longer have a trade arrangement in place with the 50-odd countries that have signed EU deals.


The net result would be that the UK falls back on the system of tariffs and regulations administered by the World Trade Organisation.


The tariff regime is low, at approximately 3%-4% on goods, but countries can impose non-tariff barriers that put a heavy dose of sand in the wheels of trade.


The UK government has moved swiftly to explore trade deals, however, with chancellor of the exchequer Philip Hammond raising the idea of a UK-China deal during the G20 summit in Chengdu.


As JMCL’s Michael points out, at some point, the UK will have free trade deals with countries that it did not have before. This should open up opportunities with suppliers where free trade outside of the EU ambit was not previously possible.


Nevertheless, the outlook for businesses remains highly uncertain. The UK is likely to need to negotiate agreements from scratch with up to 100 EU and non-European countries.


Since trade deals have been outsourced to the EU for the past four decades, Whitehall is estimated to have between 20 and 40 trained negotiators, most of whom will have to be repatriated from Brussels. In comparison, Canada has 830 negotiators.


Procurement executives may have to spend the next decade trying to secure contracts in an environment of constantly changing trade arrangements. Those looking for a silver lining may want to consider the potential job opportunities at Liam Fox’s newly minted Department for International Trade.

 

This article is a piece of independent journalism, written by an experienced journalist and commissioned exclusively by Procurement Leaders.

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