In the aftermath of the Brexit referendum, it was feared that the consequences would be catastrophic. Now, 14 months on, we’ve seen how the UK has weathered the storm – at least in the short term.
After the initial shock, the business economy has fared reasonably well, demonstrating a degree of resilience and even a slight rebound in confidence. Within the last year, the main stimulus for change has been uncertainty; uncertainty about future trade deals, uncertainty about what a split from the EU looks like and uncertainty about its impact.
However, as the two-year countdown to Brexit has begun with the triggering of Article 50 and start of official negotiations, some cracks are perhaps beginning to show and could worsen on the path ahead.
The first impact following the referendum vote was the drop in value of the pound, which although recovered slightly, remains 12% weaker against the euro and 13% lower against the US dollar than it was before the referendum.
The drop immediately pushed up the cost of imported goods which, coupled with the recovery in oil prices in the last year, has served to drive up prices. This is especially bad news for some manufacturers such as the automobile sector, which uses a lot of imported components, and for the construction sector which relies on imported materials.
‘Made in Britain’
However, with this ‘devaluation’ came the reward for exporters who were suddenly perceived as offering cheaper options for overseas customers. The ‘Made in Britain’ label continues to have a strong global appeal and is an attractive commodity in many markets.
There is, therefore, a continued opportunity for UK businesses to capitalise on the UK ‘brand’ and on the weaker pound by seeking to increase orders, attracting more customers and branching out into new markets with a financially competitive edge.
Europe has long been an attractive trade partner for the UK with its close proximity, EU trade agreements and established trading relationships providing a solid platform for export. However, opportunities exist all across the world and the horizons of UK businesses should not be limited by familiarity or geography. Positively, the Brexit shake-up has already stimulated businesses to start considering new trade destinations and UK firms are well placed to realise growth by going global.
The UK trading landscape is becoming more challenging, evidenced by the decline in GDP growth to just 0.2% for the first quarter of 2017. Annual consumer price inflation reached 2.7% in April, the highest level since August 2013: and while unemployment is at its lowest level in 40 years, wages grew only 2.1% year on year in March, suggesting a contraction in real wages, squeezing consumer spending power.
Looking ahead, we expect the negative effect of the weak pound to weigh increasingly on economic activity while uncertainty will weigh in as a serious downside risk for consumer and business spending as well as for GDP growth. Insolvencies have been rising since Q3 of 2016 and Atradius economists forecast a rise of 6% this year and 8% next year.
On a wider scale, despite the resilience seen, insolvencies are still forecast to be higher in Europe than if there was no Brexit, particularly in those countries with close economic ties to the UK such as Ireland, the Netherlands and Belgium. In such a climate, the risk of not being paid begins to become a very real concern and businesses do need to tread carefully when trading on credit, as most companies do.
Of course, businesses cannot stand still and must find a way of navigating through the risks in the backdrop of shifting foundations. It’s not about shutting up shop as there are still opportunities to be explored – if you do things right. Credit controllers need to take measures to ensure that they are protected from their exposure to risk with robust management strategies in place.
Businesses need to remain alert to the range of risks that might affect successful trade and ensure that they are adequately protected in order to futureproof themselves against any prospective loss – whether due to insolvency, currency fluctuation, bad debt or changes to the trade relationship.
We’re already seeing firms move towards short-term deals in order to hedge their future positioning but it’s also about rigorously doing your homework which is an absolute must with a weather eye on political, economic and currency risks. Also, at an individual company level, potential buyers should be assessed for creditworthiness.
The least risky option is, of course, to set payment terms to be paid cash up front, although that won’t make your business competitive and being able to offer credit terms will generally give you an edge. However, if offering credit, protecting payments falling due is always prudent. Considering other security measures such as letters of credit, examining past payment behaviour and monitoring any changes will also stand you in good stead.
Information is the bedrock of trade
The biggest cause of trading failure is not having full information, indeed information is the bedrock of sound trade, not just political, geographic, trade sector or distribution channels but also a real understanding of your buyer. It is also necessary of course to understand the legal frameworks, contractual norms and payment practices that will govern your undertaking with your customer.
When it comes to accessing information, trade credit insurers are a valuable resource; with expertise in markets around the world and business intelligence on millions of companies, your credit insurance partner can connect you to the information you need.
Trade credit insurance not only protects businesses from non-payment but also helps exporters gain that all important competitive edge, while also reducing red tape and the risks associated with trading overseas. In particular, with the security to trade on open account, an insured business has the agility and flexibility to better compete in the market.
Fourteen months on from the referendum we can reflect on the economic impacts that we have seen but the picture is still unfolding. Looking forward, nobody can predict with complete accuracy exactly what the trading landscape will look like another one to two years on from the Brexit vote. However, whatever those changes might be, if you’re armed with information and well prepared, you can mitigate against the risks and reap the rewards of new and successful trade relationships.
The benefits of an in-house bank are increasingly evident, but some treasury departments still hesitate to take the plunge. This article offers a step-by-step guide.
Transactions that encounter different currencies naturally bring the added risk of currency fluctuations – one of the many risks a firm operating in international markets must acknowledge and actively deal with. Indeed, for companies stretching across national boundaries, either through regional subsidiaries or with a client base in different geographies, the pitfalls of foreign exchange (FX) risk can – if not dealt with efficiently – put significant strain on a company’s financial health.
Since the financial crisis, national regulators have been tasked by industry bodies and international market participants to create frameworks that reflect the global nature of financial markets. However, with national regulators driving their own agenda, informed by regional political climate, regimes have diverged somewhat, creating both frictions and opportunities for those market participants active in different geographies.
The US money market reforms came into effect in 2016 and are already dramatically shaping US fund industry with investors flooding out of prime funds and into government securities. Europe is hot on the US’ heels (about a year later) with European money market fund reforms becoming legally effective in July 2017.