Since the vote on the decision to leave the EU, Brexit has become a word symbolising uncertainty for businesses in the UK. Owner Managed Businesses (OMBs) can be forgiven for feeling anxious as they are faced with a number of potential stumbling blocks for the remaining months of 2017 and 2018.
Ahead of our Inside the Minds of Business Leaders series of events in September and October, we spoke to one of our expert panellists and former Chief Economist at the IoD, James Sproule for his thoughts on what lies ahead for OMBs.
What do you think is the top concern owner managed businesses (OMBs) are faced with today. How do you recommend they might overcome it?
“There are three key issues but consumer spending is the number one concern. The economy is heavily dependent on household consumption, which cannot continue to grow with wage growth trailing inflation and savings levels falling. That said, household indebtedness is below the 2007 peak so there is unlikely to be a cliff edge in the short term.
“Immigration is a secondary concern for some OMBs, although recent reports suggest that there will be some freedom of movement between the UK and the EU post-Brexit.
“A third concern is whether big business will have the confidence to invest, thereby relieving some of the pressure on consumers to drive growth. The corporate sector has very low levels of debt, and investment has been subdued for years, so there is no reason why large corporates can’t spend some of that cash, which might also boost the UK’s poor level of productivity. If big business spends more, OMBs should benefit from some of that investment.”
Are there any potential macroeconomic shocks on the horizon which OMBs should be aware of?
“An increase in interest rates is possible, but that may benefit OMBs. Low interest rates have allowed consumers to borrow more to spend on houses, and big businesses have benefited from cheap credit. Most OMBs, however, are cash rich and so on balance could benefit from rate rises.
“A bad Brexit is another possiblity, which could have serious macroeconomic implications. If the UK were to tumble out of the EU with no trade deal, the shock could precipitate an EU-wide banking crisis. Italy’s banks are effectively insolvent, and while the Italian banking sector’s exposure to the UK is minimal, a bailout would make the Greek crisis look trivial in comparison. The impact would be felt across the European Union.
“A slowdown in the Chinese economy is also a possibility, the Chinese are trying to move from export oriented growth to domestic consumption being the key driver, a difficult task. If the Chinese economy does slow it could hit British exports. At a time when we are looking to increase trade with non-EU countries, this would be very unwelcome.”
Regulation was one of the chief concerns for OMBs in last year’s research. Are there any politically acceptable ways in which the Government can reduce some of the regulatory burden?
“One of the pieces of regulation most complained about by OMBs is the Working Time Directive. While Brexit makes reform possible, it is unlikely to be rapid. The so-called Great Reform Bill simply moves EU legislation into UK law, so avoiding any cliff edges of regulatory change. Reform will come after that. In the short term, a lot of employment law results from European Court of Justice (ECJ) rulings and so long as the UK remains within the jurisdiction of the ECJ, those rulings will remain in force.
“Tax simplification is also a priority for OMBs. Here again the harsh truth is that even holding down the total amount of expenditure (which is all we have done) is very difficult. Only once the public finances are in better shape, will it be possible to simplify or reduce the tax burden on OMBs.”
Nearly half of OMBs surveyed last year export. What challenges might they face growing their exports as we leave the EU?
“It is quite possible that the UK will transition to become a member of the European Free Trade Association (EFTA), alongside countries like Switzerland and Norway, which would mean that we would have a viable trading position with the EU quite quickly.
“If we retain a relatively frictionless customs border with the EU, which the UK government has proposed, then that will also help exporters retain their market position. This is certainly possible and the heavily trafficked example of the US – Canadian border shows how it might work.
“We have heard positive noises from a number of major markets, including the U.S., India and Australia, on free trade deals. These may take some time to conclude, but the UK is a major market and I don’t doubt that these deals will be finalised. It is certainly easier to conclude a bi-lateral deal than the multi-lateral deals the EU must undertake.
“The U.K government, through the Department for International Trade, provides assistance to British businesses looking to expand into overseas markets, including helping with trade delegations. Businesses seeking overseas expansion should contact the Department for International Trade: https://www.gov.uk/government/organisations/department-for-international-trade”