Wrexit – which Brexit model?

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In our previous blog we supported the Remain argument. Uncertainty of exit will not be clarified for many months if not years. Smaller organisations will be disproportionately affected by uncertainty as effects spread through the economy.

Decreasing confidence affects buying habits, so paradoxically organisations solely domestically focussed are, on balance, those most at risk. Those that thrive will already be innovating commercially and looking outward to a broad range of sales destinations. They will try to make themselves more flexible, avoiding saying ‘this is how it has always been done’, so when the time comes they will be ready to take advantage of opportunities that may be presented by the emerging new order.

We see three phases of Brexit impact, where different things will become clear:

Before – Next 12 months – A model emerges

As interest rates stay down, borrowing rates can improve, but how will banks respond to SME lending? They will be under increasing capital strain as uncertainty lingers, and SMEs are likely to be first hit. Even as the value of the Pound goes down, at least for now, a weaker exchange rate on the back of more uncertain trading conditions with the EU will not boost exports and long-term investment as much as previous drops in exchange rate (ERM and credit crisis) where trade rules were more stable. (1) We argue that: this is an opportunity for smaller businesses that may be less reliant on cross-border investments to even out the playing field against companies who have built infrastructure on the basis of existing institutional structures and it raises the importance of being able to act more quickly on sales opportunities both within and beyond the EU.

For the Government to mobilise trade negotiators to fill the gap left by 40 years of government outsourcing to the EU, outward facing government departments need investment – think the new Department for International Trade, UKTI, the foreign office, and the department for business, innovation and skills. The typical big corporate service providers – accountants like EY, KPMG, Deloitte and PwC, law firms like Linklaters, and even consultants like McKinsey – have been named as having had discussions with the civil service. (2) But many people have questioned the ability of the government to recruit these experts, and have indicated that the services of companies will come at a high price. At Exabler, we are building technology that can improve the speed and specificity with which the public can assess the impact of proposals / new rules on themselves and various sectors of the economy. This has many potential benefits, including:

Smaller businesses can use it to quickly assess the impact of new proposals and rules on them and their supply chain.

The government can improve the quality and timeliness of consultations and solicit constructive feedback not just from larger companies in key trading industries.

By doing this, the UK can hope to find and exploit opportunities that might otherwise be lost through the traditionally less inclusive and more top-down processes.

During – Between 12 – 36 months – The model is shaped and reshaped

1. The EU wants the UK to move quickly – implying that if we don’t, the exit will be somehow less favourable.

2. There may not be much progress on trade agreements with the rest of the world until one is hashed out with the EU. For example, “It is very hard to think what kind of relationship we will have with the UK until we know what relationship the UK will have with Europe.” Michael Froman, US trade representative. (3)

These again put the onus on accelerating trade negotiations as much as possible – negotiations, industry and public consultations, and effective communication of results. We will discuss more about this next phase in a subsequent blog post.

After – Beyond 36 months – The path to steady state

Some things won’t be in any rush to change, for example the UK’s current account deficit and high EU unemployment. However the broader fast pace of change across the globe will continue irrespective of Brexit and businesses will still need to navigate the turmoil to find the opportunities for mutually beneficial trade. This could be the subject of more than one post in future.

  1. http://www.ft.com/cms/s/2/9c746d04-4456-11e6-9b66-0712b3873ae1.html
  2. http://www.ft.com/cms/s/0/7ccfd858-41e0-11e6-b22f-79eb4891c97d.html
  3. http://www.ft.com/cms/s/0/dd6853fe-4422-11e6-b22f-79eb4891c97d.html

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