Economic uncertainty and the fear of losing access to a huge customer base and a talented pool of professionals are along the fears for businesses as Brexit unfolds.
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At a meeting of tech companies to discuss the impact of the UK leaving the European Union, organised by the Silicon Valley Bank, an economist, a business consultant and a tech trade body representative talked about where the country stands a year after the referendum result.
And there wasn’t much positivity, with the economic uncertainty of Brexit weighing heavy on decision-making in businesses. New uncertainties have been caused by the recent general election, which saw prime minister Theresa May’s plan to win a big majority backfire, resulting in a hung parliament.
Asked what would be the best possible outcome of the Brexit negotiations, Trevor Williams, former chief economist at Lloyds Bank and a visiting professor at the University of Derby, said the best outcome would be if the UK does not leave the EU.
“Aside from that, every other outcome is suboptimal,” he said. “The economy is not going to do as well as it would compared to if it stayed in the trade agreement.”
Williams said the UK and EU negotiators are in uncharted territory. “It is very unusual because you normally negotiate to join free trade agreements, not to leave them,” he said.
But it is not the end of the world, said Williams. “Clearly, we are still going to survive anyway and we are going to try to do deals with other countries. The UK has a large and dynamic economy that is open, so there is no reason why it should not succeed.”
One positive is that policy-makers will no longer be able to blame Brussels, so will have to ensure they get it right or suffer at the polls, said Williams.
Meanwhile, Giles Derrington, head of policy – European exit at IT industry trade body TechUK, said it was difficult to say what would be the best outcome. Instead, he focused on the likely outcomes.
“There are two realistic scenarios,” said Derrington. “The first is that it may take a long time and have a very soft landing. This could include five or more years of status quo to get things right, such as the trade deal and the skills we need. This could involve mirroring as much as possible what we have now, but outside the trade deal.
“There is a small scenario that the economy might turn and people will feel angry about what has happened to their incomes, which could soften it up and lead to the Norway option.”
Norway gets the benefits of the single market but has no say in EU decision-making, has to pay into the EU coffers, and must accept EU rules such as freedom of movement.
Norway model a disaster
But economist Williams said the Norway model would be a disaster for the UK. “Why would we pay for access to the single market, obey all the rules of the single market, including freedom of movement, and have no say whatsoever in the decision-making process?” he said.
Derrington said the main concerns for TechUK’s membership of about 1,000 IT suppliers include: the future of the free movement of data, what the future trade and customs deal will look like, and how the suppliers will get people with the right skills and move them around when borders close.
Not surprisingly, the latter is a top concern, given the results of recent surveys about the UK’s post-Brexit attractiveness to skilled workers from the EU. In the latest survey, Deloitte interviewed EU workers in and outside the UK, and its figures show that 47% of highly skilled workers from the EU who are already in the UK are thinking about leaving the country in the next five years, and 65% of highly skilled EU workers described the UK as less attractive since the Brexit vote.
Bretton Putter, CultureGene
Bretton Putter, CEO at business consultancy CultureGene, said there is a lot of concern at tech firms and the companies that invest in them. “This is particularly the case among startups, where many of their staff are non-UK citizens,” he added.
Capital is also becoming scarce, said Putter, with €500m in investment being put on hold. “I know of at least 10 venture capitalists that are holding back,” he said.
And evidence of this is not just anecdotal. Recent research commissioned by fintech trade body Innovate Finance showed that $783m was invested in UK fintech in 2016, compared with $1.2bn in 2015. This was a 33.7% drop in the UK, compared with an 11% increase in fintech investment globally.
But despite these fears, Brexit is still not a high priority for CEOs at businesses Putter deals with, because of other challenges. However, he is advising them to prepare for it.
Preparations include planning operations in the remaining EU countries, said Putter. “Within the first couple of days of the Brexit vote, Ireland received 100,000 new company applications,” he said. “I am advising businesses to think about their European expansion.”
A London-based startup in the audience at the meeting agreed. A spokesperson, who did not want to be named, said plans were in place for his company to set up a Dublin office.
To allay fears among startups, London mayor Sadiq Khan said recently that the capital would remain open to talent from around the world, despite the threats posed to the city’s tech sector by Brexit.
Speaking at the launch of London Tech Week, Khan said: “As mayor of London, I will do everything in my power to safeguard London’s global competitiveness and our status as a leader in innovation, particularly ensuring we can access the top talent after Brexit.
“Regardless of the uncertainty caused by the European Union referendum result, I know the London tech sector will continue to prosper.”
So why did the UK embark on such a risky path? Although many citizens who voted to leave the EU did so to reduce immigration, believing this was to blame for long NHS waiting lists and low pay, for example, there were those in the leave campaign who had ideas of changing the UK economy based on economic and political dogma.
“Some economists thought it was a good idea to leave and the reason they thought that was because they thought there would be more flexibility to drive trade deals with the rest of the world because you cannot do them on your own when you are in the EU,” said Williams.
“They also thought the UK could become a much freer market economy that would be able to take advantage of the changing world economy.
“I didn’t agree because I thought the UK would become more corporatist and protectionist and not open to the world. Unfortunately, the prime minister is like that and many people are now very worried that the outcome they thought they would get isn’t the one they are going to get.”
Derrington said the increasing amount of uncertainty, particularly since the general election, means there is a big chance of “a chaotic crash-landing for Brexit”.
“As things are going, I suspect the Conservatives will hold Theresa May in place and will focus on Brexit,” he said. “But that means they have a massive incentive to deliver something and they will recognise that they can’t do a ‘no deal’ scenario. Delivery is probably their number one objective, otherwise the Conservatives could be out of power for a very long time.”
The hung parliament has changed the dynamics in the House of Commons, said Derrington. “The maths of parliament is now incredibly important. Every single decision and amendment to Brexit-related bills will be very tight.”
Giles Derrington, TechUK
A more collaborative process is now needed for the government to move legislation through parliament, he added.
But industry fears around access to skills and customers could pale into insignificance compared with some of the geo-political risks created by Brexit.
Williams said the world is changing and the UK will lose influence outside the EU. Even its place on the UN Security Council might be thrown into doubt, he said.
When the UK joined the EU, at the same time it became close to the US, said Williams. Now it is leaving the EU, Donald Trump’s US is becoming protectionist, creating huge risks.
“For example, when it comes to the UN Security Council, it would be hard to argue against the UK making way for much larger economies and populations,” he said.