UK election result provides Brexit impetus

The UK’s political landscape — and the likely course for Brexit, with its many implications for businesses in the UK and around the world — has changed radically as a result of the December general election result announced on 13 December.

With Prime Minister Boris Johnson’s Conservative Party winning 365 seats to Labour’s 203, and the ruling party now having an overall majority of 80 seats in the House of Commons, his vow to “Get Brexit done” appears to be more likely to become a reality.

Previous UK government efforts to enact legislation that would formalise a Brexit deal between the UK and the EU failed due to a lack of Conservative MPs to ensure its passage through Parliament.

Ian Stewart, Deloitte’s chief UK economist, said: “With an 80-seat majority it is clear that the UK will formally leave the EU at the end of January.”

He said that the element of uncertainty “is now switched from the timing and nature of the withdrawal agreement, which is now going to happen, to the nature of Britain’s long-term relationship with the EU and the timing of a deal”.

He added: “That mix creates a lower overall level of uncertainty… but one that is nonetheless material.”

Deloitte data used in Bank of England research has shown that since early this year more than 50% of companies have regarded the levels of uncertainty as high or very high and Brexit has been the major source of uncertainty. This persistent uncertainty has been unprecedented and has led to lower capital investment and hiring levels, the Bank’s analysis found.

Brexit next steps

On 13 December EU leaders discussed Brexit and welcomed the European Commission’s decision to reappoint Michel Barnier as the chief EU negotiator.

In a tweet, the European Council’s president, Charles Michel, said: “We expect a vote on the withdrawal agreement as soon as possible.”

The UK government has pledged not to extend the Brexit transition period during which the future relationship with the EU will be negotiated beyond the current 31 December 2020 deadline. This view was repeated by a senior UK government minister shortly after the election, on 15 December.

A UK request to the EU for an extension to the 31 December 2020 deadline, if sought, would be needed by 1 July.

However, James Stewart, head of Brexit and industrial strategy at KPMG in the UK, said the important Brexit milestone for business is 31 December 2020.

“Business [is] undoubtedly nervous about what can be achieved in the 11-month period,” he said.

UK business, he said, was most interested in the future regulatory environment, trade, and the access to overseas workers — both highly skilled and low-cost workers. He said: “Whilst there is certainty during the transition period about the movement of people, there is uncertainty in businesses’ minds at the end of the transition period.”

He said that the question still to be answered was, “Will we be able to negotiate a trade agreement, or will we come out of the EU and be relying on WTO [World Trade Organization] rules and what that might bring in terms of tariffs?”

UK economy

While the path to Brexit now looks more certain, Deloitte’s Stewart said that, in addition, the election result will refocus attention on two important drivers of the UK’s economy: productivity, which has been weak since the end of the global financial crisis; and a slowing global economy, with the downturn coming at a greater rate than expected.

“The UK’s core markets [in] Europe, particularly Germany, have slowed particularly rapidly, and the prognosis for 2020 in Europe and actually for the global economy is at best the continuation of sluggish growth,” Stewart said.

On the UK economy, he said there was “an inflection point in the public expenditure cycle”. Growth, he suggested, may get a bit more help from government spending, but this stimulus also raises questions about government borrowing and the sustainability of debt in the UK.

Advice

KPMG’s Stewart predicted an acceleration of activity in corporate transformation programmes including companies wanting to introduce new technology.

However, he warned that there would be “winners and losers in the next year”. He pointed to the performance of the UK’s retail sector and parts of the restaurant sector, which have already seen declines. In November, there was a 3.4% year-on-year decline in retail footfall, according to research by data company Springboard, although this figure doesn’t cover the 29 November Black Friday shopping event. There has also been a 25% year-on-year increase for 2018–19 in the number of UK restaurants becoming insolvent.

He said that businesses need to understand the impact of trade agreements and examine and structure their supply chains to ensure they are robust and resilient to future changes. “It’s an area … where companies are going to have to beef up their expertise,” he said.

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