Thursday 19 October 2017

UK electorate may give us wrong result again - so firms must prepare for worst

Actors dressed as British political leaders Theresa May, Jeremy Corbyn and Tim Farron at an event to encourage young people to vote
Actors dressed as British political leaders Theresa May, Jeremy Corbyn and Tim Farron at an event to encourage young people to vote
Richard Curran

Richard Curran

As British voters go to the polls today, Irish businesses may understandably have a sense of trepidation about the result. In fact, a lot more Irish business owners are likely to stay up late tonight and watch the results come in than in previous elections.

So many were wrong-sided by the Brexit referendum result and woke up on June 24 last year to a surprise outcome that has dominated much of their business thinking in the last 12 months.

A year on from the Brexit referendum, the uncertainties remain about the final outcome. Unfortunately, things have taken shape in a way that doesn't give much room for optimism, and today's general election result may add to that.

Here are some scenarios. A resounding Conservative victory with a majority of 100 seats or more is likely to increase the value of sterling. The thinking behind it is that a strong majority would strengthen British Prime Minister Theresa May's domestic position and enable her to soften her stance on Brexit should the talks warrant it.

This would be good for Irish exporters who would benefit from a stronger sterling. This would also potentially be good for the Irish economy as a whole if it led to a softer Brexit and a deal closer to business-as-usual on cross-Border trade.

However, recent opinion polls suggest this isn't going to happen. Various polls have put the gap between Labour and the Conservatives between 1pc and 12pc. The 'Financial Times' earlier this week, based on a poll of polls, had the Conservative lead at around 7pc.

Theresa May has a slim 17-seat majority going into the election. She needs to show that her gamble of calling an election paid off. Some commentators suggest that anything less than a majority of 50 seats will be seen as a serious setback and a Tory disappointment. This would weaken the hand of the Prime Minister rather than strengthen it.

In a Brexit context, a weaker leader is not ideal for the negotiations. If there was a total upset and the Conservatives failed to get a larger majority or a majority at all, uncertainty would be heightened, sterling would fall and who knows where things would end up.

Aside from looking forward to the outcome of the today's election we can look back at how the last 12 months have gone since the referendum vote. This has been very mixed. The Government managed to get Ireland listed high on the agenda for the talks with the EU. Negotiators say cross-Border issues are important, but there is little by way of detail.

Ireland's great opportunity for attracting chunks of the City of London to the IFSC is proving mixed. We are gaining jobs, and that is positive, but it won't necessarily be a transformative bonanza.

The rhetoric around a hard Brexit in the UK has toughened and if anything it is likely to move further in that direction. The hard Brexiteers around May's Cabinet table are proving to be the more dominant voices.

The situation may be about to get a lot trickier. A weaker sterling is driving up inflation in the UK and this is eroding living standards. Even employees at the Bank of England are threatening strike action over a 1pc pay increase at a time when the cost of living is set to rise by close to 3pc.

This situation will be replicated across the UK as price rises kick in and living standards are eroded. House prices look seriously over-valued and there could be a serious British house price drop in the next 12 months to 24 months.

This will heap all kinds of new political pressures on the UK government and could also have a negative impact on the economy, something Irish exporters rely on heavily.

So, with all of that uncertainty, what should Irish firms do? Bigger exporting groups, such as Glanbia or Dawn Meats or Kerry Group, have more options. They have processing capacity in the UK and can consider increasing their investment there.

This may have negative consequences for their Irish suppliers but as business operations they can weather a lot more of the storm than smaller Irish firms can. For medium-sized firms, the situation is more fraught. However, they have choices to make. One option is to can sit around for the next two years, glued to the news to find out what sort of Brexit they will end up with.

This is akin to the farmer listening to the weather forecast all day wondering if the pending storm is going to blow the roof off his shed. Surely, his time would be better spent securing the roof. Perhaps the storm won't be that bad - he will still have a better roof.

Smaller Irish exporting firms need to get active to Brexit-proof their businesses and they have two years to do it. The first issue is currency. Some Irish firms were rattled when sterling fell to 92p last year but have relaxed a little more now at 85p or 86p to the euro. This may be complacent.

The truth is that sterling is likely to fall further in the coming two years. It may well take a dive after today's election. Even after Brexit, it is hard to see a situation where the value of sterling is going to rise considerably. Irish businesses should prepare for a cheaper sterling and all that goes with it. This means hedging, examining costs, negotiating price increases with their UK buyers and sourcing price cuts from suppliers or finding new ones.

Enterprise Ireland has been active in getting the message out to exporting firms. The agency has developed a Brexit barometer, which is a handy online tool businesses can use to identify their highest risk points around Brexit.

Enterprise Ireland believes firms should use Brexit to try and improve the business they have rather than ponder its doom. The agency is encouraging exporters to open up to new markets.

It is also asking client firms to assess every aspect of their business to see how they can do things better. This is a tough message to firms that have come through the crash and are facing a new challenge not of their making. But it is absolutely necessary.

There are steps that firms can take now to prepare for the implications of a hard Brexit, rather than wait to find out what it will look like.

However, there are some firms in more difficult predicaments. What if you have an Irish business that exports to the North and Britain and you are worried about a hard Brexit with no trade deal and WTO tariffs?

The best preparation might be to invest in the UK to service the UK market. Making that investment now could result in the loss of Irish jobs at home. And, of course, what if the final Brexit outcome is not as hard or as bad as you had prepared for? Some Irish managers could end up cutting jobs in Ireland when it wasn't entirely necessary.

Exporting firms should try to negotiate price increases with UK buyers if they can. Equally, business logic would suggest that they source raw materials or parts or product from UK sources rather than eurozone sources to cushion the blow of a weaker sterling. That may mean switching supplier from somebody in Ireland to somebody in the UK.

This will cost jobs in Ireland and already has done in a number of cases I am aware of. These are extremely tough decisions to have to make.

A year on from Brexit, the uncertainty is only getting started. Nobody knows what the final outcome will be. Even in a hard Brexit scenario there will be opportunities for Ireland. As the only English-speaking EU country, we will have a tremendous opportunity to build further on foreign direct investment successes.

In a hard Brexit, the entire UK/Ireland logistics and supply chain could change. This will carry opportunities for Irish companies not only in logistics but in supplying more food products to the Irish markets, as large-scale British competitors become more expensive.

Irish firms need to focus on making their businesses better, irrespective of what Brexit ends up looking like.

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