Brexit has fallen into second place as the most significant risk facing company bosses for the first time since the EU referendum, as weak domestic growth saps demand for their goods and services.
According to a Deloitte survey of chief financial officers (CFOs) at some of the UK’s biggest businesses, companies are now less pessimistic about Brexit after ministers agreed the terms of a transition period with Brussels to smooth Britain’s exit from the EU.
Brexit: where to now?
What has happened?
The UK and European commission have agreed on a text that completes the first stage of Brexit negotiations, focusing on three areas: the rights of EU and UK nationals in each other’s territories, the financial settlement the UK will pay, and arrangements for the Irish border. Assuming this is approved by the European council, talks can move on to the second phase, including future trade.
Is everything sorted out?
Not really. The big decisions on Northern Ireland have largely been kicked down the road. For example, if future arrangements cannot avoid a hard border, the UK will “maintain full alignment” with internal market rules – the specifics remain vague.
Where does this leave the Brexiters?
The EU’s agreement to move on with the talks means Brexit now seems inevitable, barring a major surprise. Brexiters are likely to be less pleased that May has been forced to agree to more or less all the EU’s demands, including a bill of about £40bn.
Where does this leave the Democratic Unionist party?
Watching and waiting. May somehow got its approval for the deal – perhaps by stressing that it would otherwise be blamed for halting Brexit. The DUP leader, Arlene Foster, said the new text remained worrying in areas such as the possible need for regulatory alignment.
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Reflecting the views of 106 companies, including almost a quarter of the FTSE 100, the survey found a fifth of business leaders were more optimistic about their firm’s prospects than they were three months ago. On a scale of 0 to 100 for the risks facing their business, the CFOs assigned a rating of 56 for Brexit versus 57 for weak demand as a result of sluggish growth in the economy.
Deloitte said this was the first time since the spring of 2016 – before the EU referendum – that Brexit had fallen behind any other potential risk facing businesses, although admitted that some of the weakness seen in the economy will have come as a result of the vote to leave the EU.
David Sproul, senior partner and chief executive of Deloitte for north west Europe, said: “Weak UK demand is cited as the top concern, though there is likely to be a relationship between the two. Brexit remains a major concern for UK CFOs, though one which, in the wake of the announcement of the transition deal, is easing.”
The sudden drop in the value of the pound after the Brexit vote pushed up the cost of importing food and fuel to Britain, triggering a spike in inflation and eroding the spending power of consumers. Several companies, including Toys R Us and Maplin have gone into administration as a consequence.
The economy has recovered in recent months, with signals that the inflationary effects of the weak pound are beginning to fade, while workers’ pay is gradually starting to rise. But there are still significant pressures for the economy, including weak productivity growth and potential labour shortages.
Still, the results of the Deloitte study follow a similar assessment from the Bank of England’s network of regional agents, who found two-fifths of the more than 3,000 firms that they surveyed had not spent any time at all on a weekly basis planning for Brexit. The accountancy firm EY also found there was little impact from the vote on international firms investment decisions in the UK so far.
However, there is a danger that businesses could become complacent following the agreement over the transition period, which pushes-out the date at which Britain leaves the EU until December 2020.
Ian Stewart, chief economist at Deloitte, said: “Although the transition arrangement is done, they have yet to settle the border in Northern Ireland and the future trading relationship. Were that not to happen that would be a big problem and would have a significant effect on business confidence.”
There are already warning signs for the road ahead. According to EY, around half of the foreign companies currently in the UK could consider moving assets out of the country at some point after 2020, depending on the outcome of the ultimate Brexit deal.