Handelsbanken: EU REFERENDUM –Post the vote, rebuilding the future

On 23^rd June, after 43 years of membership, the UK voted to leave the EU – a decision that surprised many, after the polls and the bookmakers indicated a vote to remain would be the likely outcome.

For some the decision will be welcome, for others less so, but what will the decision potentially mean for British businesses?

Following the vote to leave sterling fell dramatically, to the lowest level in 30 years at just $1.33 to the pound. By the end of the day it had recovered somewhat, but there were further falls when the markets opened on the Monday after the vote. Meanwhile £74 billion in value was wiped off the FTSE100 alone in just two days after the vote, while the contagion caused by Brexit saw world markets fall by $2 trillion.

While the steep falls are shocking they largely reflect the uncertainty of the UK’s situation now. But does it mean that all is doom and gloom for firms across the UK?

The biggest question for many firms is how an EU exit will affect their trading relationships with other countries. For many the ideal scenario is that Britain will retain access to the single market. If this fails to happen then the UK will potentially have to negotiate thousands of individual trade agreements, which could be a costly and time-consuming process, hitting businesses who trade overseas hard in the interim. Future trading arrangements may well not be as beneficial as the terms we currently have, which could make the cost of doing business in the EU more expensive. Firms could face higher export tariffs on goods they are selling and higher tariffs on imports, pushing up costs.

While much will depend on the trading deals secured by the UK with the EU, the outcome will also depend on the sector your business is in. Firms who have a global perspective in terms of development of products – such as the aerospace sector – are likely to be less affected by any trade disruptions, as they are less dependent on the EU market for trade.

On a positive note, with sterling down since the referendum, UK exports will become comparatively cheaper for overseas buyers, potentially giving a boost to UK firms. However, depreciation of the pound also means less purchasing power, so the cost of imports will rise.

Sectors that are likely to become more competitive on the continent as a result of the devaluation include British manufacturing - an area in which the UK is strong but has recently been expensive due to the strength of the pound. The pharmaceutical industry is another area tipped to benefit from a fall in the value of sterling.

Firms that are already trading overseas and being paid in foreign currency could also see a boost when they convert the funds to sterling.

Those in favour of exiting the EU also argue that it will leave the UK free to negotiate trade deals with countries outside the EU, such as the U.S and China, which account for a growing proportion of UK exports. This could help to mitigate a fall in trade with the EU.

A ‘bonfire’ of red tape was one of the key phrases bandied around in the run-up to the referendum. There is no doubt that the EU has overseen the introduction of a vast body of legislation, though critics argue that the UK has unnecessarily ‘goldplated’ much of this. Once the UK leaves the EU, a process that will begin once Article 51 is invoked, parliament will have to make the decision on which EU laws to keep and which to scrap. Even if the UK is free from EU legislation, it is likely to have to introduce many new laws to address the changed environment.

For many businesses, investment into their companies has taken a back seat while awaiting the outcome of the referendum. If firms fail to invest they are unlikely to grow and it could also fuel a UK downturn. This in turn will hit consumers who may rein in spending as a result.

While the uncertainty look set to continue for some time yet, the Government is taking steps to try and calm concerns among businesses. In a speech made days after the referendum vote, business secretary Sajid Javid said the Government would take steps to reduce the impact of leaving the EU on firms, by creating a more business-friendly environment. He added that: ‘Freed from Brussels’ more bureaucratic tendencies we will be able to tackle the excessive red tape that can choke small businesses. We will also be able to make our tax system even more competitive, helping local businesses to grow and attracting investment from overseas.’

Millions of businesses across the country, both small and large, will be hoping that proves to be the case.

(This story was submitted by Handelsbanken - to find out more about the team here in Fife visit www.handelsbanken.co.uk/dunfermline)