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Brexit

First response: Implications for procurement from Theresa May's Brexit speech

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If the UK’s Brexit plan was shrouded in uncertainty and ambiguity before today, then UK prime minister Theresa May’s lunchtime address in Central London tackled at least some of the questions that had remained stubbornly unanswered since last June’s shock referendum result.

 

Britain’s Brexit stance would, the prime minister insisted, make the UK “stronger, fairer and more united”. From a procurement perspective, though, one of the most high-profile policy speeches of this or any other generation, merely added to the uncertainty that has persisted over the past six months.

 

The prime minister was adamant that the UK would most certainly be leaving the single market as remaining within it would mean ‘not leaving the EU at all’. She did, though, outline her ambition to deliver a plan that offered the ‘freest possible’ free trade – although the form that takes remains as unclear now as it did the moment the UK voted to leave the EU.

 

What May won’t countenance is the freedom of movement that makes up one of the four central pillars of the EU, once again throwing into confusion how businesses will operate in the new order.

 

From a supply chain perspective, May warned that any deal that wasn’t mutually beneficial would damage and disrupt European supply chains and create barriers for those European countries looking to export to the UK.

 

That’s undoubtedly true, but while May assumed that all participants in negotiations would be “economically rational”, the fact that the other 27 members of the EU and well as the UK itself, will need to approve any Brexit deal means that the clock is already ticking at a ferocious pace – and with procurement organisations across the world looking for stability in both the short and long-term, that, according to James Knightly, senior global economist at ING, is likely to be in short supply.

 

“The UK doesn’t really have two years to negotiate, as outlined by Michel Barnier, the EU’s lead Brexit negotiator,” he tells Procurement Leaders.

 

“There will be a one to three month period of preparation at the beginning and then four to five months at the end where the deal has to be approved by all of the national parliaments in the EU along with the UK parliament.

 

“This leaves just 15 to 18 months for real negotiations. As we saw with Wallonia (a region in Belgium which opposed the trade deal with Canada) and the Canadian-EU trade deal there are risks of delays – in any case Canada’s own trade deal took seven years to negotiate. We also have to consider that the election calendar in Europe is not particularly helpful in this process," he explains.

 

That final point is a particularly pertinent one, with elections in both Germany and France taking place in the next 12 months. It would take a brave man to bet on the status quo in both countries being maintained given the shocks suffered in referendums and elections in 2016.

 

Currency volatility

 

The pound rallied during May’s speech, gaining 2% against the dollar after falling to a 168-year low back in October. Currency volatility, though, looks likely to remain a key consideration for procurement organisations up to the triggering of Article 50 in March and throughout what promises to be delicate and difficult negotiations.

 

"We’re definitely not out of the woods,” wrote Neil Wilson, senior market analyst at ETX Capital. “It could take time for it to really sink in and hit home that Britain is leaving the single market. The facts are this – we are leaving the single market and the customs union. We will try to strike a trade deal with the EU. Only the first is a certainty so this heavy bid for the pound looks risky."

 

The pound’s rise came hand-in-hand with a steep fall in the FTSE, which had risen to historic highs in recent days.

 

The intention to leave the single market could lead companies in the UK to begin scurrying around looking for local sourcing options to mitigate against the risk of higher priced imports from Europe. For the majority, however, it could still be very much of case of keeping a watching brief.

 

Knightly says there’s still very much a sense that the UK is attempting to have its cake and eat it. How big a slice it is afforded by Europe remains one of procurement’s enduring uncertainties.

 

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

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