22 August 2016

Why Brexit is bad news for SMEs

By Paolo Giabardo

With business decisions on hold, only policy makers can provide much needed signs of certainty.

By 5am on 24th June, it was clear that the British public had cast their vote in favour of leaving the EU. What followed was a plunge in the pound to levels not seen since 1985.

Since then, the markets and the pound have remained in flux. One minute the media is painting a picture of bleakness and woe, and the next it is predicting how foreign investment could create a bounce in the market.

In reality, the UK’s decision to leave the EU,  and the political fallout thereafter,  is having a huge impact across the board.

While there may be glimmers of hope for small pockets of the SME community, dependent on the type of business and location, the future of this dynamic and influential group is under threat.

With almost unavoidable uncertainty, policy makers must set a clear agenda for their hopes for an SME post-Brexit future.

Uncertainty is the flavour of the month

It’s a taste SMEs cannot savour, as business decisions stall and growth stagnates. Currently, uncertainty exists over the UK’s ability to negotiate favourable trade deals, and the timeline of Brexit is changing as murmurs from Number 10 indicate Article 50 might be delayed until 2019. The economic outlook appears murky at best.

In the run up to the EU Referendum, small and medium size firms held fire on major business decisions. But what was initially a short term delay has now become a prolonged hold on any decisions relating to company growth. After all, business growth requires a huge investment of time, money and energy to build relationships or develop supply chains – all of which could need renegotiating before they even get off the ground.

The ripples are being felt on an international level too, with currency fluctuations impacting European SMEs, and central banks are having to adjust their plans to cater for a changing economic climate.

Don’t generalise, but this isn’t generally good

As the SME community consists of an eclectic mix of firms,  when discussing the impact of Brexit, we must look at each sector to understand the relevant repercussions.

As with any economic upheaval, there are winners and losers and in the short term at least, there are some industries that look set to gain from recent events.

The currency plunge has made it 20% cheaper for people to holiday in the UK. Small and medium sized firms involved in tourism, such as online booking companies and travel guides, have benefited from the weak pound and seen a surge in business. The same goes for SMEs exporting abroad, as long as their own supply chain isn’t too heavily exposed.

Equally, professional services that can help businesses navigate the post-referendum landscape stand to gain from a lack of precedent in the current climate.

For the vast majority of the SME community however, the outlook is far from positive.

Firms operating in industries related to finance, pharmaceuticals and energy all rely heavily on the UK’s membership of the common market and the standard regulatory framework it brings. Having to cater for multiple standards and regulations, poses a potentially huge cost burden in terms of time, money and expertise.

Home and away

Geographical location also has a role to play in determining how exposed SMEs are to the macroeconomic climate.

Interestingly, the impact on SMEs round the country is almost the inverse of what the UK voted. SMEs based in and around London and the South East, tend to be less exposed to the effects of Brexit. As such they are, at present, concerned to a lesser extent.

It is those based in the regions – particularly regions who are dependent on EU subsidies and imports – that will feel the affects more severely.

And it’s not just UK based SMEs that are having to react to the changing tide. European firms will be feeling the effects of fluctuating exchange rates, having previously enjoyed relatively stable currency movements.

The impact of Brexit has also reverberated across the world, with the Federal Reserve delaying a hike to interest rates and the depreciation of the Pound and Euro. For firms exposed to currency movements, this all equates to bad news.

What policy makers need to do

In order to regain normality, SMEs are looking to policy makers to steady the ship, both on a UK level and internationally.

First and foremost, clarity is needed around trading frameworks. For the last thirteen years the UK has negotiated trade agreements as a bloc, alongside the EU. Given that the Government is looking to recruit over one hundred trade negotiators in the coming months, it looks like that the intention is to do away with the lot and start again.

But, given that trade deals take decades to negotiate, the Government needs to at least make their intention clear so that the SME community can prepare accordingly.

Confirmation that the UK will remain a member of the European single market is also paramount.

If the Government is serious about helping to fuel the growth of small and medium sized firms, they need to shed light on the details of the UK’s exit as soon as possible.

Paolo Giabardo is the UK Country Manager for Ebury.