After weeks of media hysteria, turbulence caused by the unexpected vote to leave has begun to calm leaving changes to the economic landscape in its wake. The pound remains significantly down against both the Dollar and the Euro causing the FTSE 100 to rise above pre-referendum levels, as the reduced cost of trading for British multinationals is taken into account. The FTSE 250, which is made mostly of companies that trade within the UK, took an initial nosedive but has been steadily climbing ever since. As the UK’s logistics sector looks to plan for Brexit, what do these changes mean and what might the future hold?
What Happens Next?
It is important to note that Britain remains part of the EU for the time being. Article 50 of the Lisbon treaty, the vaguely-worded statement setting out the mechanism for departing the Union, provides a 2-year timescale for an exit and has yet to be activated by the Government. Once it is invoked, we will be in uncharted territory but most agree it will take at least this long to disentangle relations. Britain can apply for an extension to the process but this must be granted by a majority of EU states. If no extension is applied for, or granted, Britain ceases to be a member after 2 years by default. The UK will retain access to the single market until such a time but UK businesses will also still have to comply with EU regulations and standards.
Despite hopeful theories from some in the remain camp it is unlikely that we will see Brexit overturned. Consensus in the governing party is that ignoring the result or trying to roll it back would be undemocratic and could further poison the political waters. The EU itself is looking for certainty and is unlikely to welcome an extended period of uncertainty arising from another referendum.
The Economic Impact
The word 'crisis' is often used in connection with Brexit but some of its effects are likely to be less dramatic and visible than the term suggests. The UK’s appeal as a place to do business goes much deeper than its membership of the EU but, in the short to medium term at least, uncertainty is the enemy of growth. It is inevitable that some foreign investment into the UK, as well as major projects within UK businesses, will be on hold until there is clarity about the UK’s future relationship with the EU. This will have a negative effect on the economy which is difficult to accurately quantify.
The reduced value of the pound will have several effects on transport companies. Importantly it will increase the price businesses pay for fuel, although the AA believes rises would be restricted to no more than 3%. There will also be an indirect affect through the high street, as companies that import goods pass on higher prices to consumers over the coming months. Given that demand for transport tends to be sensitive to fluctuations in GDP, in the majority of cases, any decrease in GDP resulting from Brexit will be passed on to the transport sector. On the other hand, a sharp fall in the Pound improves exporters’ competitiveness and should lead to improved demand. In the longer term keeping the pound down to a competitive level might help to dampen the impact of Brexit, re-balance the economy and revive productivity growth.
The European Union receives about half of all British exports of goods, rising to over 60% if you include countries that trade freely with the UK via agreements brokered with the EU. Because of this, UK production, which the transport sector relies on, faces a more uncertain future than the service sector. Producers face a broader range of possible outcomes as they are more dependent on the nature of the UK’s future trade agreements with the EU. The outlook will depend on the balance between the negative affects of trade tariffs and the benefits of opening up trade with the rest of the world. The speed with which deals can be negotiated, and the extent of new trade, will be of vital importance. In the long term therefore, many in the business community believe that the effect of Brexit on trade could well be positive. With the European market declining in importance globally, it is certainly possible that leaving the European Union will leave us better off provided that Britain can use the freedom to negotiate its own trade arrangements to good effect.
Freedom from Regulation?
Much was made during the referendum campaign of the onerous nature of EU regulations but how are they likely to change after Brexit?
The view among transport lawyers is that Brexit will not lead to a significant overhaul. Current EU regulations surrounding transport are focused on safety and compliance and these fundamental principles are widely agreed to be common sense. Keeping the majority of EU regulations will also allow us to continue easily exporting to the single market, meaning that the benefits of reduced regulation would be negligible.
That said, Britain’s departure from the EU will be a complex and unprecedented process so it will be important for businesses to keep an eye on developments that might affect driver-hours law, CPC and Operator Licences. Losing the free movement of labour across the continent would reduce access to drivers and low-skilled workers coming from elsewhere in the EU. In addition to increased wage costs, this could exacerbate driver shortages already faced by the industry. In this case the government may choose to move away from driver CPC to lower the bar for new drivers entering the market.
Negotiations may well lead to the UK joining the European Free Trade Area and remaining in the European Economic Area with no change to current rules governing free movement of goods and people. However, if a deal does not include unfettered access to the single market, stricter border controls with the EU would have to be implemented. This could delay vehicles entering and exiting the EU, reducing the efficiency of operations and increasing administration.
What can businesses do?
As with all potential threats and opportunities, Management Boards need to determine how to exploit the Brexit upside whilst planning to mitigate the effects of a possible downside. The upsides could be quite considerable. Britain, negotiating on its own, is likely to put in place trade deals with countries outside of the EU but they will take time to deliver. And it may gain a new-found energy faced with some EU partners seeking to do us down; necessity is, as they say, the mother of invention.
We do know however, that the EU will resist appearing to give the UK everything it wants for fear of further defections. It is likely that conceding to the demand for totally free movement of people would once again split the Government. So what will the compromise be?
Whilst the EU will be reluctant to restrict trade or free movement of goods, which would damage its own companies, it cannot be totally ruled out. Elements of the downside scenario which should be considered are:
- Some duty on some products
- Some border checks
- Some increased restrictions on EU nationals working in the UK
These downside impacts will affect different companies in different ways and it will be up to each organisation to consider contingency plans according to its own particular circumstances. Clearly, companies that have significant exports to Europe could be negatively affected as could those that rely heavily on low paid Eastern-European labour. In the case of border delays, we could see the transfer of parts stock back to the UK to avoid service disruption.
Until the terms of Brexit are agreed companies would be wise, when making future investment plans, to evaluate alternative scenarios: optimistic, pessimistic and realistic. In most cases, the alternatives will have minimal impact. For others, a minor planning change might provide the necessary flexibility and robustness to meet a disappointing outcome and minimise the financial consequences.