SMEs are an integral part of the economy, contributing positively to GDP, job creation, innovation as well as entrepreneurship. So what does Brexit mean for small businesses? And what will be the impact of Brexit on your business?
The UK’s decision to leave the European Union has resulted in many businesses – large and small – changing, adapting and transforming their operations. Some have decided to scale back on expansion while others see it as an opportunity for growth.
The impact of Brexit on GBP
There is no doubt that the sharp fall of the pound (GBP), volatility in the currency markets and negative economic sentiment has created a climate of uncertainty for many UK businesses and consumers.
The Bank of England issued a statement highlighting concerns about the post-Brexit economy in early July. “There will be a period of uncertainty,” the 70-page report states. “It will take time for the UK to establish new relationships with the EU and the rest of the world.”
The day after the central bank issued the warning, sterling hit the skids again and against the dollar the pound slipped to $1.28, a low not seen in 31 years, while the pound dropped sharply against the euro exchange rate. Many investors flocked to safe haven foreign currencies like the Swiss franc, Aussie dollar and the Japanese yen. Companies heavily exposed to foreign currency revenues saw their relative earnings boosted as a result.
Currency rates and the UK economy
The value of the FTSE 100 increased to above its pre-Brexit level in the days after the vote. This index represents many international companies, whereas the domestically focused FTSE 250 experienced a downward trajectory. When Theresa May was appointed as Prime Minister, after David Cameron stepped aside from the role, currency rates for the pound increased in value against the dollar and euro. The FTSE 100 and 250 then also increased in value, as some market jitters were soothed by an increase in certainty in the market.
Jeremy Cook, Chief Economist for currency broker World First, says that in times of political and economic uncertainty, appetite for credit among SMEs understandably falls through the floor. “The outlook for businesses, both small and large, is difficult to predict at the moment and the data from the UK economy is yet to show the initial effects of Brexit. We will have to wait until August for that insight to reach us.”
Opportunities and challenges of Brexit
Economic uncertainty is an issue for many members of the Food and Drink Exporters Association, according to John Whitehead its director. The association represents large companies as well as many niche firms like cheese makers Somerdale, Eat Natural cereal bars and Mrs Crimble’s – producers of gluten- free food.
On the plus side the devaluation of GBP exchange rates has made British exports in the sector, which totalled £12.3 billion in 2015, more competitive in the short-term. Whitehead explains that the effect of the decision needs to be looked at holistically. “Uncertainty is having a knock-on effect,” he says. “Parts of the economy and industry may be exported away as a result of the vote.”
Whitehead adds: “One of our SME members was going to expand his plant in the South-East of England. The Leave vote means, however, that he is reconsidering his plans. Now he wants to move production to the Netherlands where he can retain access to the single market and a willing workforce.”
Other companies are also rethinking their strategies in the face of uncertain consumer and economic pressures. Brick maker Forterra temporarily mothballed two plants in Lancashire in early July. But cosmetics maker Lush, which opened a factory in Germany earlier this year, says it will be in a better position to adapt to any new trade regulations within Europe because of its new Dusseldorf base.
Mark Lesniak, a director of Great British Store, says that many small businesses have an entrepreneurial mindset and ‘planned ahead’ of the vote by buying raw materials and hedging currencies.
The business-to-business online portal has about 400 registered users and supports these firms to reach new global markets and customers cost-effectively.
He says: “The fallout will be an opportunity and challenge. It is not all negative and the Leave decision may result in new markets opening up that small businesses have never thought of.”
For more information about the post-Brexit landscape for SMEs read World First’s Q2 2016 Global Trade Barometer here.