The performance of the UK economy is central to the current assessment of the effects of the Brexit on the UK. This is neatly summarised in GDP (Gross Domestic Product) data which for the period of July to September showed a 0.5 per cent expansion in the economy, 0.2 per cent above expectations. To what extent is this good news for small business and what will be the longer-term implications of the vote on GDP?
Brexit, GDP and the impact on small businesses
The UK voted to leave the EU in a Referendum held on the 23rd June 2016. Since then there has been a very fraught few months as investors, businesses and the public try to make sense of what is going on. To me, it is clear the previous negative predictions of the immediate effects from the vote have not been realised although as we shall see, these are still longer term concerns.
To put this release of 0.5 per cent into perspective, it is important to note that in Q2 the figures were 0.7 per cent, so ultimately it is a decline in the rate of Uk economy growth. The figures were projected to be bad at 0.3 per cent and maybe worse by some quarters so whilst positive because it beat expectations, it is still overall representative of a decline.
The impact on small businesses from GDP is wide ranging because they are the lifeblood of the UK economy. Falling GDP will have a large impact on small businesses in terms of the overall activity of businesses and consumers buying their products or services.
The 0.5 per cent growth was mainly in services which grew 0.8 per cent, lifting declines in construction and manufacturing. This is quite interesting since manufacturing has been capturing the headlines because of the weaker pound boosting growth. This indicates that the weaker pound, whilst helpful, has not overall been of benefit to this important area of the economy.
Small businesses are also more susceptible to shocks since they generally have a lower field of operation. Compared to a larger firm a smaller firm might struggle to easily call on greater investment or bank loans or diversification to shore up any weaker main markets.
Falling GDP means that smaller business may struggle to keep afloat, particularly if they import from overseas as sterling now buys less than it did before the vote. This does of course benefit exporters but as shown by the GDP data, a weak pound is not overall benefiting the manufacturing industry in the UK.
Small businesses may also be much more localised so if certain regions of the economy are struggling this will affect the peripheral businesses.
We have talked before about businesses which rely on other local business. For example, a sandwich van or café based in an Industrial Estate. If the main business in the industrial estate goes down so too will the place that serve their workers food. An IT agency or commercial property agent in the same vicinity will also suffer.
Overall the 0.5 per cent growth has been welcomed as a sign of the UK economy doing much better than expected following the vote. But it is only just over 4 months since the vote and apart from some brazen comments from both the EU and the UK, nothing has materially changed in the UK’s relationship with the EU.
Economies do not just fall down overnight, businesses in the UK and the EU who were previously trading will not have severed ties on the 24th June. Confidence has undoubtedly been affected with many business surveys pointing to understandable concerns over the future. But for now, businesses have been getting on with their day-to-day running, keeping a watchful eye on the headlines for further Brexit related news.
Down with the pound, what will GDP look like in 2017 and beyond?
One big impact on small businesses and the UK economy in general since the vote is of course the pound. The pound has dropped loosely 15 per cent against a basket of currencies since the vote and October saw sterling take the crown of the world’s worst performing currency falling behind 150 others.
This is largely because of Theresa May’s apparent pursuit of a ‘hard’ Brexit whereby the UK favours complete control of sovereignty (borders and law making) over access to the single market.
It is worth remembering the EU operates a ‘single market’ within which members of the EU can freely trade with no import or export duties. The idea is that this frees up trade and it is widely reported this allows the UK to conduct billions worth of trade every year because of access to this market. It is also worth remembering that at present we still have access to this market, nothing will change until either the Article 50 period has expired or something new is negotiated.
The uncertainty over what kind of deal the UK will get and the greater likelihood it will be a deal that avoids access to the single market has dealt the pound a big blow. This pound weakness has its own challenges all of which will influence GDP and small businesses.
As a net importer, a weak pound is bad for the UK since we buy more from overseas than we sell. Whilst selling goods overseas has become cheaper, buying from overseas has been made more expensive.
A weak pound is also pushing up Inflation which could increase the price of goods in the UK. This will have a big impact on small businesses since it means their customers will all be feeling the pinch and potentially more so in the future.
The Marmite fiasco, where Tesco were to potentially raise prices to combat their rising costs, will definitely be a feature of the UK economy. Quite simply, if prices are going up faster than wages (which some commentators expect will happen next year) then consumers will begin to spend less.
Many larger businesses and industries will have fixed their currency on a ‘forward contract’ which allows for planning in the event of future weakness. Examples include the Motor Industry and the big supermarkets. As these contracts run out their cost base will be increasing and naturally this will have to be passed onto consumers who as we may see, will already be feeling the pinch.
Business and consumers need certainty and with no concrete plans on what Brexit Britain will look like, there will be a great need for clarification to encourage business and consumer activity.
The recent GDP data for the UK is, on the face of it, good news because it shows the UK economy is growing at 0.2 per cent higher than expected. This overall figure of 0.5 per cent is however representative of a decline in the UK’s current rate of growth (down from 0.7 per cent in Q2) and we are still at very preliminary stages of what is going to be a long drawn out process to leave the EU.
Small business should be welcoming the news and taking great comfort from the fact that nothing has changed immediately and be looking to do everything they can now to protect themselves from future shocks.
Diversifying out of, or into different markets might make sense to limit the effects on their business if one of their big customers or suppliers gets into trouble.
A falling pound will be bad news for business importing, now is the time to open dialogue with suppliers about pricing. The use of ‘forward contracts’ which allow business to fix exchange rates for up to 18 months can provide certainty in these negotiations.
It is clear Brexit is not the big bad wolf some commentators may have had us believe ahead of the vote but it is still very early stages and too early to become complacent.
An economy does not just stop doing business overnight and remember, apart from a huge depreciation in sterling and some terse words, nothing has materially changed in the UK’s relationship with the EU. The long-term effects of severing ties with the UK’s biggest trading partner will undoubtedly cause trouble for small businesses.
In 2017 and beyond there are going to be many hurdles for the UK economy to overcome, small businesses should be taking this time to plan and manage for what is still likely to be an uncertain period.
Jonathon Watson is chief analyst at currencies.co.uk.