Tackling Brexit and COVID-19 together

Take yourself back to 2019, or even January of this year, and Brexit was the centre of attention. The UK’s firms were busy developing contingency plans for their businesses following EU exit. But in March, as COVID-19 took hold, business attention was diverted and many of those working on Brexit were redeployed to dealing with the pervasive and immediate impact of the pandemic.

As the prospect of a ‘V-shaped recovery’ ebbs away, many business leaders now find themselves grappling with a tentative re-opening of the economy, while also being only weeks away from a sharp change in trading terms with the EU.

With slow progress in negotiations between the two, there is now a very real possibility that no trade agreement will be reached or the deal will be limited in scope.

Whatever the outcome of the negotiations, there will be significant changes to the way the UK and the EU trade.

And, as COVID-19 has entirely changed the economic context of Brexit, business leaders have to consider the interplay between the two.

There is no doubt the initial economic shock from COVID-19 is significantly larger than any immediate impact that will come from Brexit. In particular the impact on demand (both domestic and foreign) due to lockdowns has been more significant than anything previously seen. But Brexit will have pervasive and longer-term effects.

For business leaders reviewing their plans there are three major questions:

  • Does your business have a plan in place for the end of the Brexit transition period and all the changes Brexit brings?
  • Does your business plan take account of COVID-19 and its interactions with Brexit?
  • Do you have the resources needed to cope with the balance sheet and resource challenges posed by COVID-19 in the context of Brexit?

Inter-connected economic shocks

COVID-19 has provoked some of the steepest GDP declines ever in the UK and other European economies. The path of recovery is uncertain, but it is likely many of the impacts will eventually prove temporary, even if there are may be hard-to-predict, longer-term socio-economic impacts, such as changes to supply chains or in the ways in which people and organisations work.

Brexit, by contrast, is likely to bring mostly more predictable changes to the way the UK trades with the EU and some of its other trade partners, but these changes will be permanent.

Both economic shocks will impact supply chains, often in different ways, meaning they may well compound each other. And their largest impacts are often on different sectors; overall leaving very little of the economy unscathed.

Some sectors are vulnerable to both the pandemic and Brexit:

Source: IFS and ONS

Supply chains: front of the grid for a twin hit

Supply chains are the area where we see some of the biggest interplay between Brexit and COVID-19.

Some sectors are more impacted than others, but automotive is probably the clearest example of a sector hit hard by the combined challenge because it is highly dependent on fluid trade. A car produced in the UK will often have in excess of 30,000 parts, many of them imported from the EU and beyond. These components can cross between the UK and EU a number of times in the course of the production of a car.

To tackle this, some automotive companies may need to look at how to shift supply chains because they are no longer optimal or cost effective. But for most, it means building in additional processes and resources to deal with the new documentation and checks required.

The automotive industry is also a bellwether for consumer demand. And demand for vehicles has plunged due to COVID-19, cascading through the supply chain. Add Brexit into the mix and the interplay between the two could further hinder recovery.

People: impact on the workforce and workplace

People and labour supply decisions are going to be complex in many sectors, even those which seemed little troubled by Brexit. Hospitality, tourism, travel and related services are prime examples. These sectors have seen a very significant drop in consumer demand due to lockdown measures, travel restrictions and health concerns. They are not expected to see as significant impacts from Brexit, but they tend to be reliant on lower-skilled workers and workers from abroad, often with foreign language skills. Sourcing these workers has already become harder due to COVID-19 and will get further complicated by Brexit.

Elsewhere, businesses operating in heavily regulated industries intend to move people from the UK to the EU as the end of 2020 approaches, in order to be ready for the new regulatory requirements next year. But given COVID-19 restrictions, there is no guarantee it will be possible to move people across the UK and EU.

Resources (Finance): re-evaluating forecasts

Managing resources – both financial and people in the wake of COVID-19 and Brexit – is stretching businesses. The pandemic has dealt a heavy blow to balance sheets and cash flow, with a decrease in profitability and sharp rises in corporate debt. Added the expertise needed to plan for Brexit is the same as that needed for COVID-19.

The unexpected arrival of the pandemic means there are real question marks about whether firms have the financing, capacity and people to carry out their Brexit plans in the way they had envisaged.

Move fast to check your plans, people and resources

The combination of Brexit and the COVID-19 pandemic confronts business with an extraordinary challenge. Key takeaways for business from our analysis:

  • Time is short, businesses are not fully prepared and concrete Brexit plans are needed immediately. These should be across the board from supply chains and people, and also include regulatory and tax issues.
  • Even if you have Brexit plans in place, they need to be reassessed given the changing context. Plans which may have made sense in the pre-COVID-19 context may not make sense now. Issues which might have seemed minor in the previous context may be of another order of magnitude when interlinked with COVID-19. Strategic decisions made fast as a result of COVID-19 will need assessing in the Brexit context.
  • The resources available and allocated to implementing Brexit plans should be looked over again. Do the same teams really have the capacity and expertise to deliver at this point in time given all else that they have to manage?

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