The Covid-19 pandemic has completely dominated business planning in 2020. But British businesses that buy or sell abroad or are part of an international supply chain also have the UK’s exit from the European Union to contend with.
This is particularly challenging for construction businesses, given the impact that Covid-19 has had on the sector from both a supply and demand standpoint. The last thing they now need is a no-deal Brexit.
But, with negotiations on a knife-edge, it is important to understand the potential implications that a no-deal would have for your construction business, and to prepare thoroughly.
When the Brexit transition period comes to an end on 1st January 2021, the current permit system that hauliers use to transport goods across the EU will cease. The replacement system that falls under the European Conference of Ministers of Transport (ECMT) issues only a set number of permits, increasing the chances of delays and higher shipping costs for all involved.
Cabotage – foreign hauliers working within another country – would also be non-licet and this could further impact trade flows.
Hauliers can email the Driver and Vehicle Standards Agency on firstname.lastname@example.org for ECMT permits and should be looking into running inventories up of goods and components that travel internationally to limit the impact of logistics issues.
Without a trade deal, tariffs remain the greatest issue for construction businesses. They face higher trade taxes that either compress margins or increase costs for the end consumer, or further along the supply chain.
These tariffs can only be avoided as part of a trade deal and would represent a huge issue for any part of the construction industry. Once agricultural products are removed, the average EU tariff sits just shy of 3% but tariffs change across sectors; cars sit at around 10% for example, with dairy products nudging 50% in some cases.
Further details on this can be found at: www.gov.uk/transition
As long as the Withdrawal Agreement signed last year remains in place, then the rights of UK citizens in the EU and vice versa remain protected. While there has been speculation that the UK would want to change parts of the Withdrawal Agreement, we don’t believe the UK wants to reopen negotiations on citizens’ rights.
Given the number of EU nationals working in the construction sector, there needs to be clarity over mutual recognition of professional qualifications, the export of benefits and pensions, and the rights of people who live in one member country but work in a another. Otherwise, we could see a further decline of skilled labour in the sector.
A summary of the government’s new immigration system launching in 2021 can be read here: www.gov.uk/guidance/new-immigration-system-what-you-need-to-know
With all of this and more to come from a no-deal Brexit, or a skinny trade deal between the EU and UK, it makes sense that businesses are focusing on preparation and planning to prevent a significant disruption to their operations. However, it is also important to plan for exchange rate movements.
The pound, which has been the de facto barometer of Brexit expectations since 2016, will continue in that role, adding another layer of uncertainty for international businesses.
At the time of writing, we believe the market is tentatively pricing in a deal, although GBPUSD levels of around 1.30 are acknowledging the not insignificant risk of the UK leaving without a deal.
We envisage three potential scenarios in the coming month or so:
The EU and the UK agree a trade deal
This would be a strong positive for the pound, that would likely see an increase in inward investment into the UK, a pricing out of expectations of a cut in interest rates below zero by the Bank of England, and a wider pull higher in business confidence.
We would expect anywhere between a 4-7% increase in sterling as a result of a trade deal, although Covid-19 risks would continue to weigh.
The EU and UK cannot agree, and the UK leaves without a deal
This is the worst-case scenario for the pound and would likely see it retest the lows seen in March of this year (1.05 in GBPEUR and 1.15 in GBPUSD) over the course of the 6 months following the decision. We would expect government borrowing to increase to make up for a cut of inward investment, inflation to rise on expected tariffs, a move to negative interest rates by the Bank of England and a dramatic downgrade of UK economic forecasts and business operations.
There is an extension to allow further negotiations
This scenario would likely be seen as a positive in the short term. However, we may struggle to see sterling rise by more than a few percent given the political risks an extension causes in the UK parliament and the likely positioning by markets.
In this scenario of heightened volatility and uncertainty, forward contracts, or currency options – hedges that allow for protection against adverse outcomes but also allow a client to benefit from favourable movements – will both be suitable.
Businesses that trade internationally would therefore be left with a stark choice:
1. Hope for better rates and continue to trade on spot prices and leave their business unprotected.
2. Put limit orders into the market in a bid to catch beneficial rates during the anticipated extreme volatility as clarity emerges.
3. Use forward or options contracts to hedge currency risk on an ongoing basis, allowing them to focus on the other risks that Brexit may pose to their business.
Here at Equals Money, we combine advanced payments technology with deep currency expertise and give you access to a personal dealer who will help you understand and access the best options for your business.
Give us a call on 020 7778 9365 to speak with one of our experts and find out how Equals Money can help your business. You can also sign up to our Chief Economist’s daily market reports below.