The latest in the ACT’s Brexit series was our breakfast briefing, hosted by the Falcon Group on 4 April, which looked at the key issues facing treasurers at this time of great uncertainty.
With the situation ever-changing and a no-deal Brexit too likely for comfort, which was highlighted by the keynote speaker, Sanjay Raja, although the threat of this has somewhat dissipated through the passing of the Cooper-Letwin amendment requiring the Government to avoid a no-deal by forcing a long extension to be sought.
Raja, UK Economist at Deutsche Bank, opened with the appropriately titled presentation ‘A Long Goodbye’, highlighting the time that it will take for the UK to leave the EU and agree on the subsequent trade deal afterwards – a rather long process indeed! By covering the economic data for the last few years and the trajectory going forward, Raja discussed the already seen impact on the UK economy and the impact going forward – growth is already around 1-2.5% lower than before the referendum and Brexit has yet to take place. Raja highlighted falling investment as a key concern – four consecutive quarters of falling investment is usually only seen in recessions, but this is what we are experiencing, and coupled with a decline in labour movement – two key measures for long-term growth – then future growth looks weak.
As Raja discussed, it is frequently mentioned that economists wrongly predicted the impact of Brexit but in fact, this is not the case: business investment crashed, there was a fall in the pound and inflation increased – three of the main predictions of the impact of Brexit. The only of the four that didn’t take place was a reduction in consumer spending – yet – after all, retail spending was at its most volatile in the last year than at any point in the last fifteen years. But surely a strong labour market is good news, right? Not if the reason is that capital growth is falling – after all, it’s much easier to let people go than to disinvest.
Raja’s background provided a useful introduction to the panel discussion to assess Brexit in the context of the key challenges facing treasurers today. Elementis’ Group Financial Controller, Chris Gilbert, Pentland Group’s Group Treasurer, David Ranson, CBI’s Head of Financial Services, Flora Hamilton and Falcon Group’s CFO, Chris Howarth, joined Charlotte Morgan, NED and Audit Committee Chair at SMBC Europe to address the key challenges for treasurers and what they are doing to prepare for Brexit, particularly in a no-deal scenario.
As Ranson highlighted, preparations involve spending a lot of money on something that may not happen, but if it does, will have a major impact on the business. This is difficult enough in positive economic times, but at a time of challenging global economic times, as highlighted by Raja earlier, decisions have to be made as to how much needs to be done and how much needs to be left in the wake of the ongoing uncertainty until further clarity is achieved. Ranson also mentioned the potential impact of a no-deal Brexit – customs declaration charges could wipe out the European business, by removing its profitability. On a short-term positive note, however, European customers have been buying ahead of a possible no-deal Brexit, leading to a boost for February. Ah, the joys of stockpiling: as Raja showed, stockpiling has never been so great leading to a temporary boost that, regardless of the Brexit outcome, is likely to lead to a slowdown further down the line.
Gilbert described Elementis’ Brexit plans as very much time-linked: plans have been made and they are comfortable with the first days and weeks, but when one starts looking at the month two and beyond, this is a greater challenge. Stockpiling of raw materials is taking place with help being provided on this to other parts of the supply chain, with the aim to share responsibility for these preparations. It is, however, very difficult to do much more and plan for the long term when future tariffs and trade deals are unknown as this will lead to a reassessment of the production footprint. But Brexit is only one of the challenges: the slowdown in China and the wider global economy is another of the big challenges impacting global trade today.
During the panel, the impact of Brexit on financial services was discussed – even May’s deal is a hard Brexit, as the UK would be outside of the single market and as such classified as a third country. Nevertheless, this is a discussion of mixed messages. One of the key challenges is that the European Commission will not agree to the sharing of data on day 1 – data adequacy; but on the other hand, clearing can still continue in London for a year after a no-deal Brexit. Passive servicing on sterling accounts will not be allowed, yet membership of SEPA has recently been guaranteed in all scenarios.
This was an informative and useful event for the attendees on an issue where clarity is an ideal rather than something that can be expected, and the consequences of a no deal could be disastrous. Thank you to all of the speakers and especially to Falcon Group for hosting the event!