The ‘Brexit’ Impact on Businesses & Investments

I will make a confession. I never really understood Brexit in full. I thought I had the right picture in my mind but looks like I was wrong. This post is my honest attempt to add colour and shape to the theory of Brexit. I am not going to delve in the political aspects of Brexit however I am going to set the table for its business and the economic impact.

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ritish Prime Minister Theresa May might ask for an extension to finalize on Brexit. She hopes that she can bring a turnaround by convincing the MPs that Brexit is altogether a great idea. Nevertheless, this action did portray her to be an unstable leader with a majority which is dangerously at risk. Her constant efforts towards the appeasement of the right wing failed and the nearest alternative she can lay her hands on is soft Brexit. Soft Brexit is the option which makes United Kingdom leave European Union but it has to stay within EU’s custom union and single market norms. Britain will not get a say in formulating the trade norms and policies and has to adhere to the ones created by EU. The soft version of Brexit is still a better alternative than a no-deal Brexit since the latter is expected to devastate jobs, adversely impact tens of thousands of people and cause a serious economic disruption.

The idea for Brexit started three years back when EU failed to address the wider economic problems plaguing Europe; For instance, 20 percent rising unemployment in Southern Europe. The alternatives formulated were sheer disaster. The real problem started when EU started throwing trade barriers which caused United Kingdom a discomfort. This led to UK to consider the decision of leaving the EU and formulating its own trade policy. As I mentioned, I won’t delve into the political happenings of the topic, however the decision did cause some impact on corporate environment in UK.

To understand this better, I took the help of a Decision Maker Panel(DMP), which is a survey initiated by Bank of England in collaboration with University of Nottingham and Stanford University. The respondents of the survey are 7,500 business executives in UK who helm the small, medium & large enterprises. The survey mainly covers operational aspects of a business, possible effect of Brexit on generating revenues, impact on prices, investment philosophies and employment numbers.

Figure 1: Brexit as a source of uncertainty (Source: Bank of England)

As per Figure 1, it is evident that close to 32 percent of respondents view Brexit as one of top sources of uncertainty and 37 percent view it as one of many sources in November 2018. 17 percent respondents feel Brexit as the largest source of uncertainty. These numbers fluctuate through different time periods but latest data reveals an impending risk. This uncertainty can very well set its footprints on investments in UK as you observe greater risk averseness. More statistical scrutiny on DMP data revealed alarming umbers suggesting 6 percent reduction in investment, 1.5 percent lower employment and productivity collapsing to 50 percent.

To look at the future investment environment of UK, it is imperative to consider European Structural Investment. European Structural Investment (ESI) Program was an EU initiative which was swept under the carpet when 2016 referendum was discussed. 2.5 billion euro was infused by ESI fund on average from 2014 to 2016 as per Government numbers. These funds support the SMEs and provide the requisite funding to support operational efficiency and foster innovation in business environment. The infusion of these funds creates a sense of confidence among the budding angel investors for investing in young companies. In wake of referendum, EIS froze this cash and the companies have to look in different direction for funds. Apart from lack of funding, the export industry could potentially be hit due to the departure from the European Union.  Britain has free trade with members of the European Union; however, when exporting in the future, British producers may be subjected to tariffs. These tariffs will unavoidably push prices higher.

UK is a financial epicentre of the world and to help businesses flourish on British soil, political decisions should be influenced by a strong forward-planning taking into view financial and business repercussions of Brexit. I strongly feel UK financial markets should keep building and innovating to support the global economy and be resilient to the outside shocks.