Uncertain times for UK business
Uncertainty about the outcome of the exit negotiations has hit some companies hard, while others are examining options for relocating out of the UK. Siona Jenkins discusses the outlook for UK business with Sarah Gordon, FT business editor, Patrick Jenkins, financial editor, and Adam Marshall, director general of the British Chambers of Commerce.
Presented by Siona Jenkins. Produced by Fiona Symon
Hello, and welcome to Brexit Unspun, the podcast where we debunk the political spin around Brexit. I'm Siona Jenkins.
When the Brexit process was triggered, it was not clear how Britain's cross-border trade would be affected. So little was known about the outcome of the exit negotiations. Well, since then, things have become a little clearer, but the uncertainty of the situation has proved quite damaging to some businesses, as our listeners have pointed out. To discuss this, I'm joined by Sarah Gordon, our business editor, Patrick Jenkins, our financial editor, and Adam Marshall, director-general of the British Chambers of Commerce.
First, let's start with a few stories from our listeners who wrote in with their concerns. One FT reader writes, "A business in which I was invested for over 30 years, which had withstood so much adversity, collapsed in the months following the Brexit vote, as a result of unprecedented decline in orders from many clients. 40 people lost their jobs, not bankers, but tradesmen and artisans. Its main clients included retailers and marketing agencies, which, without exception, indicated that the Brexit vote had affected their decision to cut budgets. Real or perceived, Brexit is having a seriously negative impact on investment jobs and wealth."
Another listener, who started his business in 2015, says, "My customers are predominantly technology businesses, based outside the UK. 150,000 pounds of verbally committed orders are now on hold as they reconsider where and what to invest in. Brexit has been stifling." Other areas of concern were a lack of foreign direct investment and the fall in sterling, which was affecting the viability of some small companies.
Now, Adam, from what you've been hearing, what are the biggest problems faced by UK companies, as a result of Brexit?
Well, of course, Brexit hasn't happened yet, so the problems that we're seeing at the moment are the precursors to the UK's departure from the European Union. The first and the most obvious was the fall in sterling, which affected quite a lot of companies, some negatively and some positively. Those that are dependent on a supply chain sourced from overseas and then imported into the UK often feeling the squeeze, many consumer-facing businesses, for example, in the UK. But some of our exporters, on the other hand, those who are manufacturing in the UK and then shipping their goods overseas, are having quite a positive and successful story to tell over the past three months. So sterling has certainly been at the top of the list.
Beyond that though, it's really the practical questions that businesses are facing as a result of Brexit uncertainty. Things like, who can I hire and for how long? Whom will I be paying VAT to? Will my contract still be valid? What standards do I need to comply with? And will I experience customs delays for my goods and products?
These are the sorts of nuts and bolts questions we hear from businesses every day, and they're the ones where they're inpatient to get answers. If you take them together, they have led to a decrease in investment confidence among some firms, but I'd say that's far from universal.
I mean, amongst this-- as you say, it's a mixed picture-- do you have any specific advice that you give to companies, particularly on how they can take advantage of the uncertainty of what's going on at the moment?
Well, we encourage our businesses going through a major change, like the Brexit transition, to be looking very carefully at their own fundamentals. It's really important for companies to try to ignore the political noise, and look at how some of these changes may affect them more specifically. Those that do get distracted by the latest from Westminster and Whitehall tend to be the ones who don't have their eye on the ball back at home in their own business.
Some companies are looking at currency hedging, others at their insurances. Some are looking at simplifying supply chains, or looking at the question of origin, which of course could become a major issue, as the UK leaves the customs union. So planning intensively in those sorts of areas, and looking at whether your existing contracts will still be valid or whether you need to update them, is a sort of practical real world stuff that businesses can do today, rather than wait. So we encourage all those firms that have exposure outside the UK to be looking at what they need to be doing to prepare their firms, specifically, for a period of change, and likely some turbulence.
Thank you. Now turning to you, Sarah. How do these stories chime with what you've been hearing from the business community, both in the UK and in Europe?
Well, businesses, not just here in the UK, but also across continental Europe, are very clear about one thing. They can deal with practically anything except uncertainty, in what is driving an increasing sense of frustration. And I think-- I mean, Adam will be too diplomatic to say it on air, but frankly, despair among some of the businesses I speak to is the continuing apparent complete deadlock in negotiations, and the fact that we are now 17 months away from leaving the European Union, but with absolutely no clarity about what arrangements will be in place after that.
And you know, there is a certain amount that businesses can do to prepare in the interim. You know, they can do audits of their supply chains, as Adam says. They can think about what-- if there is no deal-- will be required in terms of documentation for export. But really, without an overarching deal, both on labour and on customs, it's going to be very, very difficult for businesses to prepare.
And I think the downside of that is that some businesses, which have the choice, are going to either not invest, or invest elsewhere, and indeed, we're already seeing that. And I met with a large trade delegation from one of our European partners, and they were making a decision about whether to open a new production facility here or in Eastern Europe, and guess what? They chose Eastern Europe, and that was directly as a result. It wasn't about cost. It wasn't about the Eastern European location being cheaper. It was simply about the uncertainty.
And I think that many people who aren't involved in business don't understand how short a time 17 months is. I mean, if you're making investment decisions, hiring decisions, location decisions, that is a very, very short time.
Adam, do you have anything to add to that?
Well, of course businesses are frustrated that we are facing a ticking clock and they don't have greater clarity. And indeed, what we've been saying repeatedly is that we need to get a comprehensive transition period in place, and move on to those nitty gritty trade issues by the end of 2017, otherwise, some of the investment risks, that Sarah highlighted just there, will start to increase further. We do note that, amongst foreign owned businesses in particular, there is a concern that unless we get those transition and trade issues on the table and much more firmed up, that some of those investments could go elsewhere. We don't want to see that.
Of course businesses are frustrated. Of course they want greater clarity, as soon as possible. But many of them are also saying, we think it's going to be uncertain for quite a long time to come, so we have to batten down the hatches, do our best, and try to find the opportunities.
But I think it doesn't seem apparent that UK politicians realise how incredibly important it is to move from these high level discussions to what Adam describes as the nitty gritty. I mean, if we're just looking at customs documentation and processes. Getting new customs processes in place and the resources required, both on an IT level, but also on a staffing level, to get those all in place, even with a transition period of two years, you're talking about an absolutely huge and very difficult task. And we need to get going on that now, not in 18 months time, and not in two years time.
Is there anything that the government can do, beyond getting the negotiations moved on, that business would like to see the government to do?
I'd love to hear Adam's view on this. I mean, I personally think that government should be doing a lot more with the sort of grassroots. I mean, they're listening to business now, which is obviously good. But in terms of actually putting the resources in place to advise different sectors, it's not so much the big multinationals, they can cope they have the resources to hire the management consultants, the lawyers, to get on top of that mountain there is to climb to get Brexit ready. But if you are a medium sized or small business who exports, particularly, or who indeed imports, or is part of a supply chain that crosses the channel, you really need more support and advice from the state, at this point.
Adam, do you have anything to add to that?
What I would say about that is the government needs to be doing three things at once, and so far, it's proven not particularly capable of doing one, which is, of course, the Brexit negotiations themselves. Those need to get much, much more entrenched so that we get the transition and trade stuff firmly on the agenda.
But the second thing that government needs to do is to provide support for business that goes well beyond the Brexit agenda. And there, what I'm thinking about first and foremost is investment confidence. Government should be trying to crowd in investment using the other levers at its disposal, right now.
Preparation for Brexit includes changing our domestic policy priorities. Doing things on infrastructure, for example, on training and on digital connectivity. Those are the sorts of things which will lead to greater business confidence, if we get them right, and more competitiveness in future.
I guess-- so I do agree Sarah, and the third thing is you do need that consistent support for businesses who are trading overseas to get Brexit ready. And the specific subset that needs the most attention are those businesses who have traded only with the European Union in the past, whether as an importer or as an exporter. Those are the firms that will be least familiar with things like customs procedures, and the sorts of declarations and requirements to go along with those procedures. And those are the firms that will need some extra help.
It's the same, of course, for our continental European companies. I was speaking to trade associations from Germany, and from the Netherlands, and from Spain, and a lot of their companies, which are doing business with the UK, have never traded outside the EU. So they are looking at a situation where they will be trading with the UK as a non EU member, as their first non EU export partner. Now that is a real mountain to climb, in terms of knowledge and processes. And the worry is that, in continental Europe-- as opposed to the UK who caused Brexit-- is not top of the agenda for most of these companies. They're dealing with a whole raft of other priorities, and you know, there needs to be support from their trade associations and from their governments, as well.
So Adam, are there any upsides?
Look, there are a lot of businesses out there who are ignoring the noise of politics, trying to focus on the fundamentals, and also focus on opportunity. And I think it's important we don't lose sight of them as we deal with thorny and knotty issues around Brexit. Uncertainly can be a market opportunity for some businesses, particularly newer and disruptive businesses that don't have big legacy systems in place, and those firms which are born global, the ones who have been exporting from day one and had done so literally around the world. We're seeing a lot of confidence from them. So we need to remember not just to talk about the problems that need to be solved, and the uncertainties we face-- even though those are, of course, very grave and very important-- but also to look at some of the upside and some of the potential. There's a lot of business to be done around the world, and we need to get out there and grab it.
So Patrick, let's focus now on the banking and financial services sector, which contributes a large share of government revenues, but has taken quite a few knocks since the financial crisis. One CEO of a fintech company that supplies compliance analysis for financial institutions wrote in to say that Brexit had left his company wondering if it would need to set up a separate EU 27 arm alongside its UK hub. Is this a typical concern? And what steps are banks taking to protect themselves?
Well, I think that is a typical concern, but before I get onto that, I wondered if I could make a broad point about everything that Sarah and Adam have been talking about. Bleak as some of it sounds, for the financial services industry, it's even bleaker, because the focus of government up to now, such as it has been, has been really on those manufacturing businesses.
We hear a lot about default to a WTO agenda, which sounds like a last resort if you like. But there is at least a last resort, because in financial services, as in services generally, there isn't a WTO framework that these types of businesses can resort to. So that's really the underlying biggest concern for banks, insurance companies, asset managers, that have significant operations in the EU. They just don't have any idea at all what the framework of the future is going to look like.
I should say that the one bit of comfort that they've taken in recent weeks came from the Florence speech by prime Minster Theresa May, when it became pretty clear that there was going to be this focus on getting a transition deal, a two year transition deal. And I think that's been heartening for a lot of bankers, because there had been this real fear of a cliff edge without anything beyond it. That said, without anything being known about what we transition to, I think there is a great deal of nervousness.
To come back to your point about that fintech company, I think, yes, that is typical of even small businesses that operate in more than one country in Europe. And just to use one example that I'd heard of, a few months ago actually, of, you know, one of the biggest and brightest startups that came to the UK in recent years, called TransferWise. Their CEO told me that, you know, if he was starting that company today, he wouldn't start it in London, he'd start it in Berlin. So I think those are very real concerns, even for startup business, and that's where we really should have the biggest worries in some ways, because these are the jobs of the future.
As regards to the big banks, I think what we're seeing so far is contingency plans being drawn up. Very few operations or jobs have been transferred yet. But everybody's plans are in place. They've chosen whether they're going to set up subsidiaries in Frankfurt, or Dublin, or Paris, or elsewhere in the EU. And they will be pressing buttons at various points over the next 15 to 18 months.
I think, to come back to Sara's point about investment though, what we are seeing already is a lack of investment in financial services operations and jobs here. For example, it was a very interesting case of JP Morgan last month, and I have seen that it was setting up a new operations centre in Warsaw with a couple of thousand jobs going with that. Now, you know, who knows, if it weren't for Brexit, those jobs might well be being created in Bournemouth, where they have a big operations hub here in the UK. And I think that's where we're going to see, in the short term at least, the pain.
So how serious a blow would it be if the banks put all of their contingency plans to move stuff out of the UK into operation?
Well, I think, in the short term-- and we are talking, you know, probably within the next 18 months those buttons get pressed-- it's not going to be super painful for the city of London. We've got close to half a million jobs here in the sector, and what we're talking about, really, is a few hundred jobs per big bank, if you like. Asset managers and insurance companies will move a few more roles, as well, but we're talking, in total, you know, a few thousand jobs.
But that could well be the tip of the iceberg if the ultimate deal is much worse than people expect, and if you really get momentum behind these other operations that are set up elsewhere. Because it needn't be simply dictated by the rules, but by other things, like the economics of having cheap labour in Warsaw, or just the very fact that you've got a large operation in one centre set up and it makes sense to relocate more jobs there. So I think, you know, the longer term prospect-- and we've seen some predictions from the likes of Oliver Wyman about 70,000 jobs plus potentially moving on some scenarios. I think, you know, that might start to look realistic over a five to 10 year horizon.
Although, I do think we have to make the point that the long term comparative advantage of London versus Frankfurt, versus Paris, versus Luxembourg, versus Dublin is still very unclear. I mean, it's not that all the banks are going great. We can move to Frankfurt, great. We can move to Paris. I mean, they see real disadvantages in places like Frankfurt, places like Paris, whether it's labour laws, or the regulatory environment, or transport, or just whether their staff actually want to live there. So London will continue to have very significant advantages for the financial services industry, and I think we're going to need to see how that plays out over time, as well as which specific activities and staff move.
And I would just give one other caveat, to what Patrick was saying, is that we had an interesting piece written by our economics team about the fact that the UK has had to revise up its business investment numbers, in the wake of Brexit, and that, in fact, investment so far has held up extremely well. And I was talking to a tech startup-- not fintech, but a tech startup-- and I totally agree with you that the startups are the people we want to hang on to long term. But he was saying, ugh Brexit, why should I care, I'm investing in London, you know. So I think it's very difficult to know, under those huge multinationals and their plans, what those smaller sort of companies-- how they will be affected.
Just one final point to add on this topic of, you know, how many jobs leave London, where they go. I totally agree with Sarah. I think, you know, London and the city of London have a lot to offer. The city has being a global financial centre, not just a European financial centre, for a long, long time, and that's not going to disappear overnight, to any extent.
But what we are seeing, as well as potential jobs leaching-- even if they're only in the few hundred or thousands-- to European financial centres, we are seeing signs, already, of business of relocating to other global centres like New York, like Hong Kong, like Singapore. And of course, those financial centres see opportunities, as well. And the fact that so many of our city of London institutions, or the strongest ones these days, are American banks, you know, there is a natural inclination, if you like, when existing operations get disrupted in some way, to repatriate those operations back to New York.
And I have one final point to add, as well. I mean, I think, in all of this, it's very important not to lose sight of the potential benefits of Brexit. And one of the arguments that was made in the run up to the referendum is that the UK economy needed to change, it needed to rebalance. It needed to rebalance away from London. It needed to rebalance from its, some people would say, gross overdependence on financial services. And whilst I can understand the ones in the financial services industry, the no deal scenario is terrifying. I think the fact that this government is at least talking about an industrial strategy, and is thinking about the future of manufacturing in this country, could actually mean a stronger, more diverse and more robust economy going forward.
That's an important point. But in terms of the city versus the country, I think one unfortunate repercussion from Brexit might well be that the jobs that are the most mobile, that are the most likely to leave, are actually not those that may be in the city of London. They are the Bournemouth based JP Morgan jobs. They are Birmingham based Deutsche Bank jobs. And so to the extent that financial services jobs are spread outside the city, the downside could be that actually financial services gets even more centralised in the city of London, it becomes even more of a kind of them and us topic. And, well, we'll have to wait and see how that pans out.
Well, that's all we have time for. Thanks to Sarah, Adam, and Patrick. Thank you for listening.
We'll be back next week to look at the issue of immigration, and we'll be asking what progress has been made in clarifying the right to remain for EU citizens living in the UK and UK citizens living in Europe. We hope you'll join us then. And in the meantime, please review or subscribe to our podcast on iTunes, Stitcher, or your favourite podcast app. If you have a question or would like to suggest a topic for future episodes, you can also email us at brexitunspun-- that's all one word-- @ft.com.