Business growth in a post-Brexit climate

June 23 2016 was a pivotal day in Britain’s history and the decision to leave Europe will undoubtedly cause disruptions for the nation’s consumers and businesses, while we adjust to a period of the unknown.

We are still digesting the effects of the referendum and the Article 50 ruling is certainly making life more uncertain for businesses, as employers are concerned about the timeframe for Brexit.

In this article we examine how UK SMEs can still grow despite the uncertain post-Brexit climate.

Business before Brexit

In the run up to the referendum, evidence indicated that people running businesses small and large were deferring investment decisions. The FSB Q2 2016 Voice of Small Business Index shows there has been a sharp fall in investment intentions, with just 12.2% of UK small firms surveyed planning new capital investment in the next 12 months – less than half the 32% figure for Q2 2015. However, private bank Aldermore claimed that only 14 per cent of businesses questioned in a survey claimed that they would not be taking positive action to increase their growth. It also found that nearly 1 in 4 of smaller businesses intend to hire staff over the next five years, more than 40 percent of SMEs plan to launch new products, while over half of businesses will increase their marketing efforts.

Carl D’Ammassa, Aldermore’s group MD for Business Finance, endorsed these finding by saying:

It’s clear that SMEs are being proactive and have strong plans in place to grow their business over the next five years. Not only are they intending to promote their business through increased marketing activity but they are also taking steps to launch new products and hire new staff. Whether this is despite of or in reaction to the upcoming uncertainty brought on by the EU referendum is difficult to gauge. However, what is clear is that, these steps will serve to increase the ability of SMEs to continue driving economic growth in their communities and throughout the wider UK economy.

HSBC’s head of UK commercial banking, Ian Stuart, said:

Businesses will continue to operate either way; whether you’re a tax operator or a corner shop, you will still be trading after June.

In a post-Brexit climate many small businesses still remain uncertain about their future prospects. Post-referendum uncertainty in the UK economy has the potential to impact small business confidence.

However the reality appears less bleak than anticipated.

Post-Brexit UK economy

GDP

The UK economy barely slowed in the third quarter despite the Brexit vote shock. Gross domestic product (GDP)
expanded by 0.5 per cent in the July-September period, slower than the unusually strong growth of 0.7 per cent seen in the second quarter but comfortably above a forecast of 0.3 per cent in Reuters poll of economists. However, whilst there is evidence of growth in the service sector, these figures are marred by a contract in agriculture, construction and manufacturing.

Office for National Statistics (ONS) chief economist Joe Grice said growth was in line with the pattern since 2015.

There is little evidence of a pronounced effect in the immediate aftermath of the vote.

Consumer confidence index

UK Consumer confidence index post-Brexit

By September consumer confidence index was back to its pre-Brexit vote level, jumping six points in its biggest monthly increase since June 2015. This continues on from the rise in UK retail sales figures over the past three years. In August they were up 6.2% from the same month last year. “Overall the figures do not suggest any major fall in post-referendum consumer confidence,” the ONS said.

The British Retail Consortium reported that the total value of sales was 2.4% higher in October this year than in 2015. Online purchases rose 11.1 per cent while in-store sales fell 1.5 per cent. This increase in value sold has arisen despite falling prices.

Helen Dickinson, chief executive of the BRC, said:

Despite the inflationary pressure that’s gradually building in the supply chain, retailers are currently effectively managing the additional cost burdens and continue to entice their customers.

Fast growing sectors

Last week, a survey of purchasing managers in the services industry found the sector was also growing at its fastest rate since January.

The fastest growing subsector was “jewellery and watches” for the second month in a row, indicating that foreign buyers may be taking advantage of bargains thanks to the cheaper pound, said Paul Martin, UK head of retail at KPMG.

Inflation

Inflation has increased, with the Consumer Prices Index (CPI) rising to 1% in September. Raw material prices have risen, partly as a result of the falling pound, but the ONS said there was “little sign of this feeding through to consumer prices yet”.

SME groups announce Brexit partnership

Nine of the main SME trade bodies will join together to amplify their voices as the slow process of exiting the EU begins. The FSB, along with 8 other organisations, issued the news at the end of last week, saying they would coordinate their efforts in the interests of offering positive reassurance to small businesses.

The organisations are:

  • Federation of Small Businesses (FSB)
  • Enterprise Nation
  • National Enterprise Network
  • Open to Export
  • IPSE
  • The Entrepreneurs Network (TEN)
  • the Institute of Chartered Accountants, England and Wales (ICAEW)
  • British Library Business and IP Centre
  • Coadec.

According to Emma Jones of Enterprise Nation, the move is critical in order to maintain a clear, positive message from the UK’s small businesses.

It’s more important now than ever before for entrepreneurs to maintain optimism and look forwards, not backwards,” she said.  “The worst thing we can do is talk ourselves into a recession when formal negotiations leading to exit will take at least two years.

Inevitably there will be new opportunities – and there are things businesses can do to protect themselves from changes that might affect them in short term and in the future.  We have come together to make sure small businesses can easily get hold of the information and advice they need during the current period of uncertainty.

Simon McVicker, director of policy and external affairs at IPSE, meanwhile, focused on the importance of making sure SME voice is heard in the negotiations:

Now we are leaving the EU, IPSE believes the priorities should be new global trading arrangements, cutting burdensome regulation on small and micro businesses and ensuring that Britain has the most flexible and attractive economy in the world.

How UK SMEs can still grow in a post-Brexit climate

Funding for business growth

It is crucial for the growth of the UK economy that the country’s 5.4 million smaller businesses continue to seek finance in order to invest, grow and prosper. It is also important that businesses understand – and have confidence in – the growing choice of funding options available to them.

The UK’s smaller business finance markets are dominated by the four largest banks. Between them, HSBC, Barclays, Lloyds and RBS groups accounted for over 80% of small business loans in 2015, according to the CMA’s retail banking report. The British Business Bank’s 2015/16 Small Business Finance Markets report found that more than half of UK smaller businesses go only to their main bank for a loan when looking for finance, and do not even consider other options.

Businesses need to be able to access the most appropriate type of funding for their needs – small business finance is not ‘one size fits all’ and many businesses need help – and information – in order to secure the right type of finance.

Watch out for our series of blogs later this month on alternative funding options available to SMEs.