Businesses still in search of clarity around trade in a post-Brexit landscape
Economy Watch By Neil Gibson, chief economist for EY in Ireland
This is my first Economy Watch in my new role as chief economist for EY across the island and my move from academia to the corporate world has given me a fresh perspective on the great Brexit debate. I have been interacting with our teams who are helping firms across the island plan and prepare against a backdrop of very little clarity.
Typically, businesses are identifying and measuring their potential exposure and developing mitigation strategies across a range of plausible scenarios. Unsurprisingly, they are desperate for clarity on what new trading arrangements will be and there would be general support for a transition arrangement that would effectively prolong the status quo for a few years.
There is no appetite for one arrangement during transition and then a subsequent deal at some point in the near future. Firms are developing plans across the categories one might expect:
● Strategic planning: what are investment, acquisition and disposal plans? Are their price, appropriateness or desirability impacted?
● Trade modelling: what tariffs might be faced, including within the supply chain and how might this impact sales and margins?
● Non-tariff costs: what administrative and compliance costs might be incurred?
● Regulation: what will be the changes to regulation and how will they impact?
● Talent: will the ability to attract talent be impacted by potential new UK migration laws?
● Tax implications: will there be direct or indirect impacts on tax liabilities?
● Logistics and processes: what are the implications for shipping, travel and IT systems?
● Competition analysis: how does my exposure compare to others in the sector? What opportunities or risks does this present?
Depending on the client and sector, the level of analysis under each heading is flexed as firm location and sector greatly influence the range of potential impacts. The level of pragmatism is admirable and reflects the nature of global business which faces changes to trading conditions on a daily basis, not least with respect to currency, which has already fluctuated markedly since the vote. In the majority of cases, businesses have advanced plans in place to accommodate the most likely outcomes.
Helping smaller firms
In contrast to larger firms, there is a risk that smaller firms will not be able to prepare as fully as they lack the expertise or resource to develop a response strategy (for example 49% of smaller firms have no written business plan according to the IntertradeIreland Business Monitor, compared to just 16% of larger firms).
Many smaller firms will have had no exposure to customs paperwork and will not have the people in-house to advise or implement change. Equally, their software systems or administrative processes may not be set up to handle the new requirements necessary post Brexit.
Thinking about how to assist smaller firms is likely to increase demand on the development and support agencies as they continue to move from awareness advice to response and strategy support.
There is a further risk emerging which is one of possible complacency. The Irish economy is growing strongly and Northern Ireland is enjoying pockets of strong growth.
Purchasing Manager data is positive, unemployment continues to fall and confidence surveys remain positive across the island. There is a (hopefully small) possibility that firms may perceive that Brexit may not be as disruptive as had been projected and, therefore, there is limited need to scenario plan and strategise. Clearly this is not the case - the majority of change lies ahead.
Currency effects masking potential performance divergence?
On the face of it, there is increasing divergence across the island: both GDP data and employment data suggest Northern Ireland is lagging behind the Republic of Ireland.
The latest Composite Index data suggests growth is likely to be below 2% for Northern Ireland in 2017 compared over 3.5% in the Republic of Ireland. The Northern Ireland labour market is also expanding at a more modest rate. Confidence levels are strong across the island but real incomes are rising in Ireland but falling in NI. As discussed by Conor Lambe in a recent article, this is due to the divergence in inflation levels (nominal pay rise data suggests broadly similar levels of pay increase across the island of just over 2%).
In the Republic, there is increasing anecdotal evidence about the squeeze on GB exporters from the strong euro. This is evidently the effect of currency movements and, although things have stabilised somewhat in recent days, it is possible to imagine parity being achieved at some point along the bumpy exit process.
Cross border shopping flows, which will intensify leading up to Christmas, and increased tourist flows are helping partly offset domestic pressures in Northern Ireland and the export boost is extremely welcome.
Without this currency induced cross border spending, the performance differential would be much starker.
Change at a more personal level
In the spirit of change, as mentioned, I will be experiencing Brexit through a new lens, working as chief economist for EY, based primarily in Belfast and Dublin. Having worked with the firm for over a decade, it seemed a natural step during Brexit to join full-time and get closer to the firms who have to make decisions now in an uncertain landscape.
I am fortunate to have been asked to remain as a visiting professor in Ulster University and I will still get to do occasional guest lectures and work with the forecasting and modelling teams to develop outlooks and forecasts for the economy at the regional and sub-regional level.
A world without teaching and forecast modelling feels unimaginably unpleasant to me. I have a strong belief that the scale of challenge that lies ahead will require innovative solutions requiring a blended mix of private sector, academic and public sector expertise and I look forward to being part of that nexus.
Be it corporate responses to Brexit, or to the rapidly escalating training and recruitment challenges, or policy choices relating to delivering increasingly expensive public services (eg health and elderly care, infrastructure or education), there will need to be creative thinking and brave choices made.
Part of my job in EY is to help with those choices, to look at options, to think of ways to fund them and to develop new ways to analyse, monitor and refine delivery.
I look forward to sharing the journey in forthcoming Economy Watch articles.