UK Firms Don’t Want to Talk About You-Know-What

Who could blame British companies for wanting to move on from Brexit? If only it were that easy. Two years after Brexit was declared “done,” the UK’s withdrawal from the European Union is still weighing them down. Getting to grips with the challenges facing the UK economy continues to demand a cold-eyed view of the country’s biggest change in its trading relationship with the world in the past half century.

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Corporate executives appear to have been making a valiant effort, all the same. The word “Brexit” came up just 24 times in earnings calls and other presentations in the fourth quarter, based on an analysis of transcripts from companies on the 584-member FTSE All-Share Index. That’s down from 55 a year earlier and a five-year peak of 637 mentions in the first quarter of 2019, when former Prime Minister Theresa May was struggling to win backing for an exit agreement. Harry Potter author J.K. Rowling once compared Brexit to Voldemort, the dark lord that her characters refer to only as “you-know-who.” It seems that his real-life counterpart is gaining a similar aura of unmentionability in the nation’s boardrooms.

The reticence is understandable. Most business people prefer to get on with business rather than be sucked into divisive political wrangles that drag on for years. There’s little purpose in continuing to carp about a reality they have no ability to change. More to the point, 2022 brought a host of more immediate concerns: higher interest rates; the spike in inflation and energy costs; the Ukraine invasion and supply-chain disruptions; and signs of a looming recession.

To gauge how Brexit has been supplanted in the hierarchy of corporate anxieties, consider last week’s Decision Maker Panel survey from the Bank of England. The DMP, which comprises chief financial officers of small, medium and large companies and is designed to be representative of UK businesses, showed that respondents estimated higher interest rates would lower their capital expenditure by 8.1% relative to what would otherwise have happened. At the same time, the survey’s Brexit Uncertainty Index stood at 21.2 in December compared with 36.3 a year earlier. Only 4.3% named Brexit as their largest source of uncertainty, down from as high as 26.4% four years ago.

Business investment is key to productivity growth (more and newer machines, technology and so on help companies to operate more efficiently), and increasing productivity in turn is critical to raising real incomes and building prosperity. The UK has a long-term productivity problem, and its rates of investment have trailed those of developed economy peers such as France, Germany and the US since the global financial crisis more than a decade ago. So the reason that companies are planning to cut spending matters.

That’s not to say that CFOs are wrong to focus on rising rates. The higher cost of capital self-evidently raises the hurdle rate for investment decisions, causing projects that might be viable at a lower cost of financing to become unattractive. Moreover, uncertainty is a pivotal factor in the process. No one knows for sure how far borrowing costs will have to climb to choke off inflation, which reached a 41-year high in October. Meanwhile, Brexit uncertainty has clearly receded, following the passage two years ago of the Trade and Cooperation Agreement, or TCA.

Against that, the monetary-adjustment period is likely to be more short-lived. An 8% decline looks bad, though the survey perhaps shouldn’t be read too literally. The response is relative to what would have happened without the increase in rates, so doesn’t necessarily imply an absolute fall, as Paul Mizen, a University of Nottingham economics professor who is a member of the DMP project team, points out. Neither does the survey distinguish between investments that have been scrapped outright or just delayed. Business investment, in any case, is a volatile series, swinging between a 21% year-on-year quarterly decline and growth of 15% during the past three pandemic-affected years.

The Brexit effect, by contrast, is large, real and here to stay (an earlier BOE survey estimated a 23% decline in investment stemming from the UK’s decision to leave the EU).

A few examples, all from recent months: One of Britain’s biggest pork producers spent $4.8 million hiring 400 butchers from the Philippines to deal with a staffing crisis. A manufacturer in Dorset said importing parts or raw materials from the EU had become a “time-consuming nightmare.” A Danish bacon exporter said it had to produce an additional 33,000 sets of documents a year to trade (it decided to build a plant in the UK instead, which admittedly could be counted as a Brexit success). A June report forecast fishing industry output would fall 30%; a parliamentary group said costs such as health certification, customs checks and VAT agents’ fees had destroyed the economics of smaller fishing businesses. Such stories are legion, so it’s no wonder polling shows profound second thoughts among Britons.

The danger is that the urgent challenges of a turbulent year obscure the far greater cumulative impact of this one seismic event. The TCA set the broad shape of the post-Brexit world, but much remains open to further negotiation or refinement. Brexit uncertainty may have gone away; its legacy hasn’t. A failure by companies to speak up will only weaken the impetus to minimize the costs and seek a smoother and more productive trade relationship where possible.

Like it or not, business executives will need to keep talking about you-know-what.