Analysis: 6-month Article 50 Brexit extension

Recent developments in the ongoing political saga surrounding the UK’s plans for exiting the EU provide businesses with an opportunity to re-evaluate their strategic decisions.

Experts are urging businesses to use the latest Brexit delay as an incentive to continue their focus on planning for Brexit — instead of using it to ignore the possible ramifications of the UK’s impending departure from the EU.

EU leaders have offered Prime Minister Theresa May a flexible six-month extension to the deadline by which the UK must leave the EU under Article 50 of the Lisbon Treaty. The extension to 31 October 2019 supersedes the original 29 March and the more recent 12 April deadlines.

However, it still remains unclear when the UK will actually exit the EU.

The special meeting of the European Council on 10 April concluded, “If the Withdrawal Agreement is ratified by both parties before [31 October], the withdrawal will take place on the first day of the following month.”

May remains committed to leaving the EU with a deal “as soon as possible”. She is keen to exit before the European Parliament elections, which will be held 23–26 May. If the UK fails to hold these elections, the UK’s withdrawal will take place on 1 June, European leaders have stipulated.

Jeremy Hawkins, senior European economist at Econoday, said the deadline extension meant the immediate no-deal cliff edge had been avoided and that a solution involving a UK-EU customs union was more likely than before.

Despite the continuing uncertainty associated with Brexit, some recent official UK economic figures had been better than expected, he told FM.

He said: “Manufacturing is certainly keeping its head above water. It may be struggling a bit, but it certainly is not drowning as people might have assumed it might do because of all the Brexit uncertainty.”

UK manufacturing output showed a 0.9% increase in February following a 1.1% rise in January, according to official figures.

However, other indicators were less favourable, Hawkins said.

The UK’s Chartered Institute of Procurement and Supply’s recent survey revealed there was a fall in new orders for UK companies for the third month running in March, with export demand particularly subdued. The CBI, which represents 190,000 UK businesses, announced earlier in April that across the distribution, manufacturing, and service sectors there was a fifth consecutive quarter of flat or falling activity.

This means there is a chance of downward revision when the manufacturing output figures for the first quarter are released in May, Hawkins warned.

On market reaction to the Article 50 delay announcement, Hawkins said the volatility of the pound had been remarkably low over the course of the past several months, and the sterling-euro rate showed minimal reaction to the 10 April European leaders’ meeting. This simply reflected the fact that only the timetable had changed; the core issues had still to be resolved.

Contingency planning

Emily Khan, PwC’s Beyond Brexit lead, said there was a temptation for “all businesses to breathe a sigh of relief and put Brexit to the side … with that extra six months”, but that instead “it should be an area of continued focus”.

She said the risk of a no-deal exit was not eliminated, and contingency plans should be preserved and reviewed.

“There were quite significant stockpiles [of goods] to mitigate the risk of delays through the [UK’s] border during April,” she said.

Some companies with perishable or seasonal stock — for example, in the food, pharmaceutical, or fashion sectors — would now need to consider rolling back the stockpiles they had built up, she said. They would then need to make a decision of whether or not to rebuild the stockpile later depending on whether and when an exit deal is agreed.

Companies that have goods with a longer shelf life or who have put in place low-cost changes might be inclined to leave contingency planning on hold, she said.

“We’ve seen a lot of [businesses] sourcing warehousing capacity that they can turn on and turn off quickly and maybe put in place a low-cost contract that allows the option to turn on more capacity without having actually turned it on.”

Regulated markets

However, she said, some companies with regulated market access, such as financial services and pharmaceuticals companies had “created entities in Europe and secured licences to be able to serve the European market in a no-deal situation”. She added: “They have had to move roles and people into those new entities. In most cases those licences would have been date-linked, not politically or legislatively linked. So they’re already live.”

The extension provides an opportunity for these companies to take a step back to understand what best to do with the short-term tactical investment to maximise its value to the business more generally, she said.

All businesses should be encouraged to stop looking at Brexit “as an acute tactical challenge and more of the prevailing backdrop to their strategy, their operations, their investment activities for the medium to long term”, she advised.

Uncertainty would persist beyond this year. “It’s a common myth that when the deal is done, we will finally have certainty,” she said.

She also acknowledged that there had been “a real pool of businesses that have been very reluctant to prepare for Brexit”. She explained that in contrast, “There is a group that were on it straight away — largely regulated [businesses] but also typically those with overseas owners. The Japanese business community in particular [was] very active very early.”

Meanwhile, at energy services company Centrica, a Brexit steering group continues to work to co-ordinate different Brexit-related planning activities across the group.

Carolyn Clarke, group head of audit, risk, and control, spoke to FM in December about the company’s scenario planning for the then-possible Brexit outcomes. She talked again to FM in April. “We still continue to prepare for every scenario and obviously to respond when there is some clarification as there has been in some areas,” she said. “[From an audit perspective], we did a readiness review of the business’s Brexit plans back in January, and we identified a number of areas where improvements could be made and where there was some inconsistency between different parts of our business. We are revisiting that on a periodic basis as the situation evolves.”

The prolonged period of uncertainty “renews the determination to focus on what is controllable to really make sure the organisation is as strong and healthy as it can be”, she said.

— Oliver Rowe (Oliver.Rowe@aicpa-cima.com) is an FM magazine senior editor.