Will Brexit increase or lower your business costs?

Will Brexit increase or lower your business costs?

Written By Jason Smith- blogger and energy expert.

The United Kingdom EU referendum took place earlier this year on Thursday, June 23, with a majority vote announced the following day to exit the EU membership. During the lead-up to the vote, the Remain campaigners projected much “doom and gloom” for the economy if voters chose to leave.

Although the result is non-binding, the new UK government led by Theresa May is likely to see through the wishes of the population by invoking Article 50 of the Lisbon treaty, which states any member of the EU has the option to withdraw, later this year.

The actual cutting of the apron strings between the UK and the EU could be by the end of 2018 at the earliest, or six years away at the latest. From now until the end date, the UK is still a fully paid-up member with no changes to trade or legislation.

Impact Since the Vote

Now the dust has settled, we can begin to see the vote’s immediate impact. There are really just two major economic changes since the decision in June:

1. The pound sterling to US dollar exchange rate immediately fell by almost 10% to the lowest levels in 30 years. The Euro rate fell by 6%, but is still higher than 2013 rates. This makes exports cheaper and imports more expensive. So for those of us exporting overseas, our products are more competitive, but the cost of imports could rise soon.

2. The UK Purchasing Manager’s Index measuring economic activity fell to its lowest level since the Credit Crunch of 2009. The PMI is often seen as a future indication of GDP growth.

It’s still too early to predict the next six years, or even the next six months, in term of economic impact. Even during the referendum campaign, neither side could categorically state what would happen if they won. Consumers may now delay spending decisions until they feel more certainty on the optimism for the economy as a whole and how it affects their living standards.

What has been apparent is that countries such as China are keen to forge trade deals with the UK that haven’t been possible with the EU. Although some funding decisions have been delayed due to the uncertain future, others are driving forward to invest in the UK since the Brexit vote.

Likely Impact on Business Costs

There’s still a sense of uncertainty about how the result is going to pan out. However, for the majority of businesses, it’s probably “business as usual,” with greater emphasis on purchasing and cost control.

Here are our thoughts on what’s going to happen to costs over the coming years:

Staff costs are likely to remain neutral in the medium-term until a true Brexit is undertaken. Some of the EU employment legislation may be repealed, which could reduce some erroneous costs. If your employees are from the EU, there’ll be no change for them and they’ll be able to stay in the UK. In the future, skilled workers may need to apply to work in the UK under a points-based immigration system. If there are any limits on skilled workers entering the UK, this may increase employee costs.

Depending on any new immigration policy, it may be more difficult to find people for your organisation. You may find it takes longer to employ the right people and your recruitment costs increase.

Energy costs could rise in the short- to medium-term, as wholesale electricity prices are some 20% higher than at the beginning of the year and quite volatile. Much of the UK’s gas and electricity is sourced from overseas, so the exchange rate reduction is likely to increase the cost of this commodity. If you can lock in a long-term contract rate, then now is the time to take action.

Telecoms costs are likely not to change because of the extremely competitive nature of the industry. All investment and costs of the providers are borne in the UK, so no change is likely to their cost base.

The largest transportation cost for most organisations is fuel. The oil price is reasonably stable, but as it’s priced in US dollars, we will see an upward trend at the pumps for petrol and diesel. Although wholesale prices are presently low, the long-term trend is negative.

Raw material costs are dependent on where they’re sourced and global markets. The latter has seen some low prices this year for commodities such as iron ore, which is at a seven-year low. Most are priced in US dollars or Euro, so the exchange rate is the largest driver of any base cost changes.

The cost of borrowing is forecast to remain at an all-time low in the medium- to long-term, with the Bank of England signalling both lower interest rates and additional stimulus packages. The positive news from the BOE also helps keep the sterling from falling even further than current levels.

What Happens Next?

That, unfortunately, no one really knows. Most commentators are playing a guessing game and it’s going to take months, perhaps years, to see the impact either way. Perhaps people are currently being cautious, which by its very nature reduces activity in the market.

Author Bio- Jason Smith is a blogger and energy expert who has helped businesses increase their energy efficiency for over 10 years. Jason’s valuable expertise has helped thousands of companies cut their costs each year. He manages the website Business Electricity Prices, which advises small- and medium-sized businesses on reducing their utility bills, and continues to share his knowledge with the corporate world.