With less than three months to go until the Referendum, how can companies prepare? Of course, the answer to such a question is that it depends. It depends on the business that the Company is in, it depends on which way the Referendum goes and it depends on what happens after the result is known. Thoughts are necessarily random, but perhaps can best be looked at in various distinct categories and we suggest the following might be a framework to start:
Will we carry on as before if the vote is to stay?
Probably the answer is yes. One might assume a bounce in stock markets in the short term, but this will probably fade quickly and thoughts turn back to the sickly world economy. Sterling seems likely to rise with predictable consequences for importers and exporters. Top end house prices, particularly in London will probably rise again as we, once again, become a safe haven for foreign money. We think that interest rates will remain low for the foreseeable future as the UK, along with the rest of the world, continues to wrestle with the aftermath of the financial crash and hopefully defer the next one.
So what happens if we leave?
Probably not much difference in the medium term – a modest further fall in markets and sterling and little change in interest rates. The changes will be more subtle, but more far reaching, particularly in labour markets. There will be skill shortages in low paid jobs: agriculture, hospitality and manual work, which will lead to wage inflation and reduced service levels. In the medium term, these problems will become significant and it is not easy to see how the roles can be mechanised.
A larger problem will come in jobs requiring greater education, science, technology, engineering and financial services, which now all employ significant numbers of imported labour from Europe and further afield. Their loss would be keenly felt at all levels of the economy.
Most pundits agree that there will be a marked slowdown in the economy, although there seems to be little consensus in how long it might last.
If the thoughts above are correct, then what can this mean for the medium sized business?
- Consider further automation to reduce reliance on low skilled imported labour
- Take any opportunity to push up prices to prepare for wage inflation
- Consider ‘offshoring’ certain processes
- Train and develop higher skilled employees and consider recruitment and retention strategies
- Invest in technology, but otherwise conserve cash: consider deferring regular capex unless it has a quick payback
- Be opportunistic: consider buying competitors or undervalued assets.
In economic terms, there seems to be little benefit in hedging exchange rates or interest rates in general terms, although, of course, it would be sensible to cover specific transactions happening over the next few months where possible. We are aware of one company with a large fleet of vehicles which has decided to hedge fuel costs for a couple of years to protect from a fall in sterling increasing the price they pay.
As may be seen, planning is difficult and the outcome uncertain. However, if forced to call the result, we find the Scottish experience instructive: they did not like the status quo, but the alternative was too scary and too uncertain. No doubt this is behind the Government’s present ‘Project Fear’. Ultimately, we are guided by the great 19th century economic thinker, Hilaire Belloc, who declared (in connection with a visit to a zoo) “Always keep ahold of nurse, for fear of finding something worse”