After Brexit: what business wants the UK to do next
Rain Newton-Smith, Chief Economist, Confederation of British Industry (CBI)
As many pack up the family car and hope for the best of the British summer weather, now seems a good an opportunity to pause for breath and reflect on the aftermath of the UK’s referendum on European Union membership.
The speedy formation of a new government under Prime Minister Theresa May has provided some of the confidence in leadership that business was looking for. But there is much to do and the business community is clear that the government needs a plan and a timetable before it starts Article 50 negotiations. So what does the business community in the UK want the new ministers to focus on?
The British economy was on a reasonably firm footing going into the referendum, as evidenced by the 0.6% GDP growth figure for Q2, though it had lost some of its momentum from last year. And while uncertainty was already affecting business confidence, household spending was supported by stable job creation in a low inflation environment.
Since the outcome of the referendum, sterling has borne the brunt of increased uncertainty, reaching its lowest level against the dollar for 31 years earlier this summer. But a weaker pound could benefit some exporters, making them more competitive overseas. Firms with significant foreign currency earnings and those competing with imports are also seeing some benefits. However, given complex global supply chains, many manufacturers and retailers will also face higher input costs, which will offset some of the competitiveness gains. And consumers will see higher prices in the near-term as the cost of imported goods rise.
Image: The Washington Post
Weathering the early weeks is an important milestone. While we have seen a lot of financial market volatility, in general markets have continued to function well, and our members have said liquidity has been available when needed. Interbank market rates have barely moved, reflecting justified confidence in the banking system.
The capital requirements of our largest banks are now 10 times higher than before the crisis, and the Bank of England has told markets it will make up to £250bn in liquidity available if needed. The Bank is already battled-hardened in dealing with crises, and has been sure-footed in its response thus far. The Financial Policy Committee has relaxed rules around capital buffers to allow for more leeway in lending to businesses and households.
What we are facing is a change in our trading relationship with the rest of Europe and potentially the rest of the world, which will have a fundamental impact on our economy over the long-term. While it’s too soon to provide an assessment of the real economy, our latest surveys shows a weaker picture for UK economic growth in the near-term.
Looking at individual sectors, a mixed picture emerges. In manufacturing, although investment intentions are softer as uncertainty weighs on corporate spending plans, the weaker pound is helping to boost exports’ competitiveness. But consumers have erred on the side of caution immediately following the referendum with weak retail sales, and there are expectations for slower growth ahead in other areas of the services sector too. Business optimism, in particular, has fallen to low levels across sectors.
It is worth noting that the Confederation of British Industry’s (CBI) latest surveys are likely to have captured sentiment at a low point, as some data was collected days after the vote, before the formation of the new government. And sentiment tends to overreact to unexpected events.
We need to remember the UK is starting from a position of relative strength. This is a base on which we must build by creating stability that embeds confidence among consumers, investors and businesses.
Image: REUTERS/Luke Macgregor
So the government needs to focus on developing a clear plan and timetable for the negotiations, to provide a measure of certainty for businesses, which are getting on with the job and continuing to invest, as we’ve seen from GlaxoSmithKline with its recent £275m commitment to expanding three manufacturing sites across the UK. Clarity on our continued ease of trade access to EU as soon as possible is of vital importance, so businesses can continue to plan and invest for the future.
Infrastructure must also feature as part of the government’s priorities. Giving the green light to expansion at City Airport — creating jobs and contributing to future economic activity — sends the right signal to investors. We must build on that through finally making a decision on airport capacity in the South East.
Protecting the status of current EU migrants is also of vital important. People often overlook that companies feel a real duty of care to the people who work for them. And many business leaders in a range of sectors from universities, to small cake and fruit producers, to big multinationals, want to give reassurances that a significant proportion of their workforce will be able to stay in the UK. As we move forward, we need an immigration system that allows our businesses to access the talent and skills they need from around the world while addressing public concerns about pressures on our public services. Equally, it is incumbent upon businesses to do more to train their own staff so they have the skills they need to succeed.
There’s also much we need to do to address how different regions are sharing in the UK’s prosperity. Outside of London and the South East, estimates of real output have not recovered to pre-crisis levels, with knock-on consequences for living standards.
But our research suggests there are things the business community and policymakers can do to address this. We can learn from the re-unification of Germany, the reinvention of Bilbao as a city of culture, the growth of the Tech Forest in Portland Oregon, about how business and government can work together to create true partnerships that regenerate and bring prosperity.
Ultimately, the most important effects of the vote will flow over the medium to long-term, depending on the change in the UK’s terms of trade, regulation and access to skills. As the options for the negotiations take shape, it will be more important than ever for the British government to partner with business in navigating its approach.
Originally published at www.weforum.org.