Welcome to the age of uncertainty

    The triggering of Article 50 will definitely change the UK business landscape. How will it affect the ‘temperature’ of our local economy? From our informed contributor responses, it is clear that Brexit concerns currently overshadow business agendas.

    Uncertainty, instability, volatility, risks – were words mentioned by all our contributors to this Q1 2017 Taking the Temperature survey.

    While with exchange rates favouring exporters, inbound tourism and inward investment the perception was ‘business as usual’, Simon Brooker of BDO noted: “The longer Brexit uncertainty continues, the more likely it is to impact on larger, more strategic decisions that businesses need to make.”

     Pressing matters such as rights of EU citizens already working in the UK and continued UK/EU exchange of innovation and skilled labour, required government clarification.

    After Brexit negotiations on departure terms began, business “state of flux” was likely to increase. “Larger accountancy and advisory firms such as BDO, which work across international borders, will be important in helping UK and overseas businesses keep up-to-date with changes, help them adapt their working practices, and succeed in this fast moving environment.

    “The Government must ensure the UK continues to be seen as an attractive place to do business; to encourage overseas companies to invest here; to help existing UK businesses to prosper.”

    The ability to establish our own rules and trade deals with non-EU countries could help make a more attractive UK business environment.

    With a company providing part-time finance directors to assist small businesses, well-informed Mark Nicholls believes that Brexit era uncertainties will produce financial volatility, especially within foreign exchange.

    While the weak British pound helps exporters, it hinders importers, and Tectona believes current exchange levels are “the primary reason the UK economy has not nose-dived post-Brexit.

    “Movement in exchange rates of the magnitude we have seen, and in short timescales, can decimate business profit and cashflow.” People are already grappling with this very big issue, and there could be trade tariffs and quotas coming. No-one knows what the Brexit end-game will be; its costs overall to British business.

     

    Taking the Temperature

     “The opportunity, arguably the responsibility, that we as financial professionals have is to make it clear to people that they should be very scared of what currency risks can do to their business, and then help them manage and overcome those risks.” *

    Jon Stradling of HSBC echoed the need to support customers through this period. “UK companies cannot afford to freeze their business plans and wait for uncertainty to lift. We need businesses to be confident and ambitious around selling their products and services overseas, and new trade agreements will be critical to expanding the range of business opportunities available to UK exporters and importers.”

    Highlighting Brexit’s positive momentum for exporting beyond Europe, he added: “The sharp decline of sterling against the euro and dollar has represented an immediate opportunity that many exporters have already grasped. In the longer term, however, the UK cannot depend on devaluation alone.

    “The UK is a world leader in services and we expect this momentum towards businesses trading in services to continue. Technological advances, rising consumer spending and falling transportation and travel costs have hugely expanded the opportunities for trading services across borders. Brexit means the UK has a unique opportunity to evaluate how we trade services, particularly in emerging economies.”

    Jonathan Hughes of Leumi ABL agreed that uncertainty would delay important decisions.

    “Regardless of political persuasion, we need to treat Brexit as an opportunity. We know there will be a period of uncertainty, and considerable negotiation at government level, but Britain has significant trading relationships that should be encouraged and developed.

    “While exporters are doing well, the apparent long-term realignment of exchange rates is a concern for importers who have seen purchasing costs increase 15-20%. That can’t just be absorbed, and will lead to inflationary pressure, potentially requiring an interest rate rise.”

     

    Locally, property consultant Giles Blagden confirmed that instability concerns were delaying some occupier market decision-making on business relocations and affecting transaction volumes. “It is also reducing the number of speculative developments starting and the appetite for higher-risk investment opportunities.” 

    However, with lack of supply holding up rental values, there are good regional deal opportunities for those with cash or access to affordable funding streams.

    FISCAL Technologies is currently just entering Europe, and Brexit will definitely affect its software sales there, said David Griffiths.

    The Brexit vote has cooled some business relationships, and with FISCAL relying more on EU partners instead of direct sales, trading is likely to be harder.

    Additionally, business costs will increase significantly with FISCAL having to host datacentres in Europe as well as UK.

    “We also have a number of Europeans working within our company and recruitment from Europe is going to be more complex and costly.”

    Greater post-Brexit complexity in global supply chains will undoubtedly increase risk and costs. “But, our software solutions are about reducing both of these, so I think overall there are opportunities for us.”

    And for the UK overall?

    “We won’t know the outcome of negotiations for a long time, but it seems likely there will be increased tariffs that will impact European sales. And, some companies may choose to relocate from the UK at the same time as immigration becomes harder, so ‘UK plc’ may find it harder to adequately staff its companies.”

    A talent drought – the risk of losing access to the best and brightest tech developers from the EU – is also the biggest concern among Chris Smith’s clients.

    “Highly-qualified young people with an appetite for success and change come to the UK knowing we have a thriving start-up culture, and if this tap is turned off they will not be easily replaced.”

    Unfortunately, the number of UK computer science graduates is not sufficient to fill the jobs available. “As they are inherently risky jobs there needs to be a supply of highly-educated risk-takers – something we do not produce as it’s not in our collective UK psyche.”

    Smith had also heard rumours that since the Brexit vote some UK companies applying for EU ‘Horizon 2020’ research and innovation grants are being excluded from funding. “Whether the UK Government is able to fulfil its promise to ensure that UK businesses have access to grant funding remains to be seen.”

    Similarly, filling low-paid jobs previously undertaken by immigrants could become difficult.

    While investors in his sector might want to await the Brexit impact, investment in UK businesses is now cheaper for US and Asian funds and trade buyers, Smith pointed out. The UK investment sector would also be pleased to break free from EU regulations surrounding Venture Capital Trust funds.

    On the UK’s future, he added: “We now live in a global society, and stepping backwards will not be good for the UK or its economy.” Continuing as an individual global player would be hard, and he could see the UK dropping out of the G8. “If the EU survives another decade – and I’d only give this a 50:50 probability – I think it highly likely that the UK will want back into the fold, unless Scotland breaks away first.”

    * This month Tectona is producing an Entrepreneur’s Guide on best practice in managing currency risks.

     

    Taking the Temperature

    OUR INFORMED PROFESSIONALS …

    Giles Blagden: MD, Hicks Baker

    Simon Brooker: Lead partner, BDO

    David Griffiths: CEO, FISCAL Technologies

    Jonathan Hughes: Regional sales director (Thames Valley & SW), Leumi ABL

    Mark Nicholls: Founder, Tectona Partnership

    Chris Smith: Consultant entrepreneurial finance director and NED

    Jon Stradling: MD, large corporates, south region, HSBC

    We also asked our contributors about Heathrow’s expansion … still effectively being on a stacking flight-path

    Brooker: “This has been dragging on far too long. There’s no doubt we need to increase our southeast airport capacity. The longer it takes to agree how we accomplish this only adds to the uncertain business environment.           

    “With the UK about to leave the EU, the Government must make sure there are no infrastructure barriers to discourage companies from doing business in the UK.

    “It is important that a final decision is made as quickly as possible so that work can get started.

    “Thames Valley businesses should make sure that regional and national organisations such as the local enterprise partnerships, the CBI, and Chambers of Commerce, plus their local MPs, know their views on the matter and continue to put pressure on the Government to take action.”

    Blagden: “This has to be led by a lobby of the largest employers investors and taxpayers, so as to get the right attention.”

    Nicholls agreed: “The Thames Valley community can’t afford not to get behind airport expansion. It really is a matter of publicising our views, lobbying our local councils, MPs and ministers to make sure critical infrastructure projects are not kicked into the long grass by other distractions such as Brexit.

    Nicholls felt the Government should “bite the bullet and do both Heathrow and Gatwick.

    “It makes good business sense for the nation to build extra runways now. Otherwise, it will be like the M25, which ironically connects the two airports.  By the time the M25 was completed it was in urgent need of upgrading and widening.  The same will be true of our runway capacity”

    Smith: “This will be a purely political decision, so I doubt we can have any impact.”

    … and gender pay-gap legislation coming into force this April

    Gender pay reporting legislation takes effect from Apri 5, requiring employers with 250 or more employees to publish statutory calculations every year showing how large the pay gap is between their male and female employees.

    According to Daff Richardson and Gemma Woodhouse at Penningtons Manches, businesses will need to publish the mean and median hourly pay gap between men and women. They must also report the annual mean bonus gap (which includes commission) and publish the numbers of men and women in each quartile pay band. The regulations have clarified what a ‘quartile’ is and include steps to follow to put employees into each band.

    The final regulations use a broad definition of employee. Many self-employed workers engaged as consultants, independent contractors and partners including LLP members may therefore be caught. This means many more employers are likely to come within the regulations as these workers will count towards the 250-employee threshold. 

    There is no specific enforcement mechanism, but the data must also be submitted to the secretary of state and industry league tables may be created, leading to naming and shaming. If you have not already done so, now is the time to produce a gender pay report to highlight – and if possible correct – any areas of difficulty before the report has to be published.

    Brooker felt gender pay-gap (GPG) reporting, seen by some as an additional burden, was actually a positive step.

    “The need to publish this data will put gender pay equality firmly on business agendas and highlight where inequalities occur.”

    He countered corporate concerns that GPG data might be used adversely by unions or employee groups and required within public-sector tender processes, by highlighting that GPG disclosure could also enhance company reputations, bolster employee morale, and provide a competitive edge for recruiting and retaining staff.

    Nicholls suggested pay gaps were “closing glacially”. He felt transparent GPG reporting was beneficial and ‘UK plc’ should be aiming for “comparable worth”. But, he queried if the extra business administrative burden was justified.

    “It’s hard enough running a small business without another potential banana skin like this, which may not achieve the required outcomes. I can’t help thinking this could be too much of an intrusion of politics into the management of private businesses.”     

    Smith doubted the new GPG legislation would achieve anything positive. “In fact, I think it will do more harm than good and will eventually be dropped.

    “Reporting of pay levels only leads to further discontent through lack of understanding of how businesses are structured and the different roles genders undertake.”

    Blagden felt GPG reporting would make little difference, although pay equalisation could impact staffing levels. There was little pay variance or discrimination at professional levels, he believed, although men were more demanding. “If there are sectors with disparities, the law of economics will play its part.”

     

    Taking the Temperature
    Penningtons