Brexit and your business

5 July 2016

Unless you have been living in a cave you will know a vote in the UK has set the country on a course to leave the European Union. But what does that mean for sustainable business in New Zealand?

Brexit sneaked up on almost everyone. It seemed like a peripheral issue. Even most of those campaigning for it didn’t seriously believe they would win.

The referendum revealed a deeply divided country largely at odds with its political leadership. It also raised concerns about the quality of democratic debate. The referendum campaign was characterised by claims and counterclaims made with apparent disregard for consequences or accuracy.

It has triggered political turmoil in both major parties in the UK. The prime minister has resigned. His party has descended into intrigue and infighting over who will take over. Instead of capitalising on the disarray the opposing Labour Party has chosen to follow suit. Senior Labour MPs are trying to oust their own leader, who was voted in by 60% of the party members only last year. Even Nigel Farage the leader of the UK Independence Party who made Brexit his political ambition has now resigned.

Perhaps most startling of all is the enormous complexity of the diplomatic and legal task ahead to make Brexit a reality. The Leave campaign did not include a coherent plan on how to make leaving the EU actually happen, or on what terms. Several EU leaders have indicated that they would like the UK to get on and leave as fast as possible. They have also stated that the UK should not hope for preferential terms of trade once out of the club.

The markets reacted to all this uncertainty by wiping enormous value from the pound and UK based businesses as investors sent money away to safer places. The wobbles were felt across the globe. So what does this mean for sustainable businesses in New Zealand?

One of the most immediate threats is that trade barriers thrown up between the UK and Europe could prevent the UK being used as a convenient staging post for EU expansion. Companies concerned about that include Auckland based Karma Cola.

Matt Morrison from the company says: “Karma Cola has a complex supply chain – we’re buying from growers in Sierra Leone, India and Sri Lanka and we’re brewing and manufacturing in NZ, the UK and Austria. We’re then selling in Europe and the UK – all in a range of currencies – uncertainty is not our friend, so Brexit is making life more interesting than we’d like it to be.”

We spoke to Bevan Graham, NZ Chief Economist for AMP Capital.  

“The truth is that we just don’t know what is going to happen,” he says. “That’s why it’s difficult to pin down and why there has been so much uncertainty.”

He said the turmoil in the financial and share markets was not a panic response. It was more about the market re-adjusting from the expectation that Remain would win. The market had stacked itself up ready for that. When the result went the other way there was a rapid adjustment as all those market ‘positions’ unwound. The end result has been to put the New Zealand dollar back to where it was three years ago against the Pound, so it isn’t like we are in uncharted territory.

That said, Bevan warns that the current recovery could be something of a ‘false dawn’ based on the expectation that central banks around the world are poised to step in.

“It’s not the markets being relaxed about what’s likely to happen,” he adds.

What to watch for   

The sharp appreciation in the New Zealand dollar against Sterling makes NZ exports more expensive in the UK at a time when a reduction in consumer confidence may also be reducing demand.

Bevan recommends businesses with exposure to the UK and European markets keep a close eye on business and consumer confidence in the UK.  

“We know that nothing changes until the end of two years and the UK may stay in some sort of free trade arrangement with the EU. But we just don’t know what happens beyond that,” he says. “With that comes a whole lot of uncertainty. When things are uncertain consumer and business confidence move lower.”

New Zealand government agencies like Ministry of Foreign Affairs and Trade and New Zealand Trade and Enterprise will be among many trying to get answers on what happens next. They will also be providing information and advice to NZ businesses.

Whatever does happen will take a lot of negotiation time to sort out. In the meantime there are signs that the pause in capital spending that began in the run up to the referendum may last some time. This could impact New Zealand businesses looking for sales in that area.

“We have uncertainty in the long term on trade access and labour mobility rules,” says Bevan. “You will see businesses pretty cautious about investment and hiring. If we are going to see a recession in the UK it will be mild and in the later part of this year.”

The best advice

Bevan says: “Any business at any time should not have all their eggs in one basket. Be as diversified as you can.  That’s an easy message if you are more a commodity exporter, but if you are more of a niche manufacturer into a niche market you may have a bit more thinking to do. It’s about watching those demand indicators and keeping close to what’s happening with any negotiations.”