In a recent webinar in partnership with moneycorp, global experts in foreign exchange and international payments, we took a deep dive into the potential implications that recent events such as Brexit and the pandemic are predicted to have on supply chains for suppliers and SMEs. Our special guests, Dr Adam Marshall, Director General for the British Chambers of Commerce and Vicky Price, Chief Economic Advisor and Board member at the Centre for Economics and Business Research, explain the 5 key issues affecting the future of businesses.
State of the Economy
While both Brexit and the pandemic may have offered suppliers and SMEs an unprecedented opportunity to explore new global relationships and re-examine how best to mitigate emerging risks, there are hidden and new unexpected costs to be navigated too. Walking us through the latest forecasts from the International Monetary Fund, Vicky Pryce notes that while market uncertainty remains at an historic high, the largely successful vaccine rollout and a subsequent return to normal life are predicted to strengthen the global economy in 2021. But the questions is, when will that improvement start?
According to Vicky, the hit in 2020 has been really substantial. Among the G7, the UK had the worst fall in Gross Domestic Product (GDP) and this is attributed to three key factors:
The high percentage of services in the UK economy
The fact that UK lockdown measures were slower to be implemented than in other countries
The impact of Brexit, in particular the anticipation of a no deal outcome. ‘The faster you fall the faster you’re meant to pick up’, she says. The data shows that with a bit of luck, the UK economy should continue to strengthen through to 2022, but a lot depends on the types on policies introduced in the future and the extent to which the UK government continues to support the recovery.
The Impact of Brexit on Trade Barriers
The concurrence of Brexit and Covid-19 has made it difficult to interpret the isolated effect of one or the other on business. Vicky highlights, ‘we have seen quite a lot of problems in terms of trade with Europe. UK exports are expected to come down very significantly, and that could infiltrate other opportunities for onshoring or substituting with selling to other countries. Overall, UK trade will suffer, not just trade in relation to the EU, but total nuclear trade. The resulting losses are likely to be particularly significant when it comes to services.’
Given the issue of uncertainty in the current business climate, Vicky explains that for all services, encompassing a range of industries and professions (such as financial services, airlines, architects, accountants, engineers) the costs and barriers to trade have increased by between 40% – 50%, which is an area that will require a lot of attention for the future.
Referring to a recent report from the National Institute of Economic and Social Research Vicky deduces that the UK has already lost about 2% or 3% percent of GDP. This is in comparison to where the UK would have been if they had stayed in the EU, mainly because of reduced business investment. According to Vicky, the expectation is that after ten years the UK will have lost about 4% of GDP, and it’s just not going to regain that. While the trade lost with the EU will be made up with trade deals with other countries, a lot of foreign direct investment will be lost, as the UK are no longer going to be a gateway to European migration. This is an important part of the problem. Migrants, as a community, pay more into the UK exchequer than they take out, so without them the UK loses a lot in terms of productivity, and economy of scale. Referring partly to a recent statement from the Bank of England, Vicky warns that it’s expected a lot of these predicted losses will happen within the first three years.
“There are a lot more businesses now putting priority on supply chain resilience rather than the lowest possible cost”
As a result of both the pandemic and Brexit, Dr Marshall reiterates that there are serious logistical and supply chain issues affecting a lot of companies. Citing a shocking statistic, he reveals that the cost of transporting goods to the UK from various EU destinations in recent months has been 10% to 30% up on what those costs were in the third quarter of last year. While some of that initial shock seems to be receding, he predicts that what may be left is a residual structural impact and higher long-term costs for businesses trying to move goods across borders. This will be accentuated further by the loss of connectivity due to the pandemic. ‘What is absolutely key is the early re-establishment of trade routes for services and goods, and for air connections.’
The Impact of Working Capital
Cash is the biggest single preoccupation for most of businesses at this stage and, unfortunately, many companies across the UK are running on empty. In particular; hospitality, leisure, tourism, and aviation. According to Dr Marshall, the problem has a trickle-down effect. All of these industries and businesses, have long and deep supply chains into their local communities. This means the impact of any one of the big and well-known companies in this area experiencing difficulties, is not just confined to that individual company, but is spread across wide supply chains around the UK and around the world.
Dr Marshall highlights the importance of working capital, so that companies have the chance to rebuild their demand over the coming months as they reopen but they should also keep in mind the issue around growth capital. ‘Lenders are going to be more risk-averse and government support will start to recede, so the availability of growth capital through both equity and debt is going to be hugely important to so many of our businesses.’, says Dr Marshall.
The Impact of Policy Changes
With regard to the policy environment for businesses, Dr Marshall praises the abundance of support packages for businesses provided by the government, while noting that it’s important that support continues through to the end of 2021.
Moving forward, he stipulates, ‘the Chancellor has got to come out with big incentives for future investment. The companies that have cash on their balance sheets have to be incentivised to use that money if we want to see growth in the coming years.’ He also points out ‘the last thing we want to see are increases to business taxes to pay for the consequences of the pandemic. All of this will have an impact not just on business operations, but also on sterling. We’ve seen even just in recent days, with discussions about the roadmap out of lock down, the UK’s vaccine program, the expansion of testing and financial support, an interesting impact on currency, which we may see continue following a sustained re-opening and recovery.’
The Impact of Workforce and Location
Our home and work lives have effectively melded, and we’re seeing the impacts, many mental health-related, on staff and subsequently on businesses. Predicting the future of work, Dr Marshall says, ‘we’re going to end up with a hybrid working life and a hybrid working world, and we need to start having open discussions in our businesses about what that looks like and how it affects productivity and success.We also need to think about the decline in footfall that many of our major centres have experienced as they have been vacant for so long. This will have a profound impact on concentrations of business and economic activity’, says Dr Marshall, predicting that the impact will also be felt in towns and rural areas as we reorganise economic activity and our working lives.