20 September 2017

Helping UK businesses navigate Brexit

As Brexit negotiations continue, our September webcast featured Mark Berrisford-Smith, Head of Economics for UK Commercial Banking and Karen Briggs, UK Head of Brexit at KPMG. They discussed upcoming crunch points in the negotiations, what businesses need to consider and how to navigate the muddy waters of Brexit.

Below is a short summary of the key issues discussed, from the importance of scenario planning to protecting margins and managing supply chain pressures.


UK remains in a holding pattern

Despite the triggering of Article 50 back in March, negotiations have progressed frustratingly slowly. “Lots of noise, not much action” [2:05] has been the theme of the last 6 months. The Government's only solid commitment remains to an exit that includes no access to the single market and agreement that a transitional period is likely.

The EU Summit on 19th October will be a crunch point in negotiations so far, deciding “whether enough progress has been made to move on to discussing the things we really want to discuss, which is the ongoing trade and economic relationship.” [2:49]. If the EU decides it hasn't, the Government will be faced with a dilemma.

Impact on the UK economy

“A slowdown has taken hold” [4.10] following the sharp fall in the value of the pound last year and the squeezing of household disposable income as inflation increases. The pound is “at a more attractive level for export, but it takes a long time for that to feed through, if it ever does” [4:53]. And, whilst capital spending “hasn't fallen off a cliff” [5:09] firms remain cautious.

The pound is at a more attractive level for export, but it takes a long time for that to feed through, if it ever does.

How is Brexit affecting profit margins for UK firms?

A lot depends on whether a firm is “on the frontline of Brexit” [6:15]. In general, there's no issue with profitability at the moment - “it's no worse than it was last year, no worse than it was the year before” [6:57] However, if we approach 2019 and no deal is in place, tariffs are applied to goods and services traded with the EU and supply chains are altered, “there will definitely be adverse impacts for some companies.” [7:20]

There are other pressures, outside of Brexit “weighing on margins” [7:28]. “Brexit is [not] the biggest issue firms are going to face in terms of profitability” [8:18]. Looking at how businesses “can use their resources in a different way” [15:26] is increasingly important to protect margins.

What's the impact on supply chains?

Continued uncertainty makes it difficult to predict, but many businesses are reviewing their existing supply chains, particularly those with “a high reliance on a very integrated European supply chain” [12:52] where significant cost and process risks exist. These reviews are highlighting inefficiencies and providing opportunities for businesses to consider new markets and providers. What's vital is keeping conversations open with suppliers - those in the EU will be facing the same uncertainty - and remaining “flexible and nimble” [23:55].

What's vital is keeping conversations open with suppliers.

What's the plan?

The extent of business planning for Brexit depends very much on individual sector and company. The most important thing is to “put someone on point,”[16:20] tasking them with considering business exposure across legal, regulatory, HR and supply chain fronts and identifying "what … mitigants you can put in place” [16:34].

Although change is unlikely to be rapid, “it never does any harm to look at somewhere new” [18:23] and it could uncover opportunities in new markets that you'd not considered.

Brexit could be a positive, acting as “a catalyst to re-think the future of business” [10:39], tackling issues that exist regardless of Brexit, around cost, pricing, and productivity.

Time is not necessarily on our side. Many of the actions needed to mitigate against a `hard Brexit', like setting up a new entity in Europe require a long lead time. “We need to start worrying next September if a deal doesn't look likely” [21:48]. That's when we face the real possibility of a “cliff-edge Brexit” [19:34] and disruption to business as normal.

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