Brexit means Brexit. But what does Brexit mean for SMEs?

Posted on Posted in Bank of England, Exports, SMEs

The Federation of Small Businesses and The British Chambers of Commerce met with Theresa May earlier this month as a way for the new Prime Minster to ask the SME community what they need post-Brexit. The Prime Minister has assured small businesses that cuts to EU funding will be replaced and that the SME sector would be “at the heart” of the renegotiation strategy.

But what exactly does Brexit mean for Britain’s small businesses? Can we build up an economy in these uncertain times, and can SMEs find Brexit opportunities?

We are in no doubt destined for many months of uncertainty as politicians grapple with the referendum’s ramifications. Brexit Secretary, David Davis, has hinted that Article 50 of the Lisbon Treaty (the official mechanism to split from Brussels) will be triggered in early 2017, suggesting the UK will only break away from the EU in 2019 after two years of talks.

The National Institute of Economic and Social Research (NIESR) has predicted that the UK has a 50/50 chance of falling into recession within the next 18 months whilst the Bank of England slashed its 2017 growth forecast from 2.3% to 0.8%.

I have long held the opinion that the UK economy was headed for a slowdown before the referendum outcome was known. Brexit may compound it in the short term, but I don’t believe it is the root cause. Indeed, our SME Confidence Tracker study shows that businesses across Britain were adjusting their expectations in Q2 (before the referendum).

Almost a third of SMEs said that the uncertain economic environment within the UK caused them to hold back on investment, with the proportion of SMEs expecting growth dropping by three percentage points to 45% in Quarter 2 2016.

While there is much talk of downturn, there are opportunities on the horizon for many SMEs if they look beyond our shores.

On 3 August, the CBI reported that Britain’s SMEs are expecting to boost exports over coming quarters as the UK becomes more competitive, thanks to a devaluation in the Pound. Our SME Confidence Tracker shows the proportion of SMEs investing in export activity rising steadily since 2014. This is certainly something we are seeing in our International and Trade businesses as many SMEs begin to consider export activity, particularly those who manufacture or source goods from within the UK.

While UK interest rates were cut from 0.5% to 0.25%, the Bank of England has signalled that they could go lower if the economy worsens. The worry I have is that a weakening Pound (caused in part by falling interest rates) could increase inflation and thereby necessitate the need for rates to rise more rapidly. I think there was a strong case for the MPC to sit on its hands and not cut rates. The Bank of England Governor, Mark Carney, said that the decision to leave the EU marked a “regime change” in which the UK would “redefine its openness to the movements of goods, services, people and capital”. It is this redefinition of openness that SMEs have most to gain from but also most to lose if the opportunities are not seized.

Mark Carney also announced the Term Funding Scheme, which it is hoped will help mitigate a reduction in the BoE’s benchmark interest rate for commercial banks, supporting them in their efforts to pass on lower rates to customers. The aim of the TFS (which has a capacity of £100bn) is to avoid “perverse effects on the supply of lending from the cut in Bank Rate”.

This move somewhat baffles me as I have been saying for a long time that there is too much money chasing too few businesses. It strikes me that this is a move to help bigger businesses rather than smaller players. I have also warned the Bank that the SME lending bubble will burst. Pouring more petrol on the fire may delay the moment things go awry, but my sense is that it could increase the magnitude when things do.

As Britain grapples with the realities of the economic ramifications of the Brexit vote, it will be incumbent on the Government and the BoE to work together to protect the smallest as well as the biggest players in the economy. As the Prime Minister said, SMEs need to be at the heart of the renegotiation but they also need to be at the heart of economic and business policy.

In the first few weeks of her premiership, the Prime Minster has travelled extensively to meet key political and economic figures to gauge their perspectives and concerns on the issue of the UK withdrawal from the EU. That the SME community is being given a direct line to the PM so early into her administration is a credit to her commitment to Britain’s small businesses and hopefully the sign of future things to come – and soon.

Share:Share on LinkedInShare on FacebookTweet about this on TwitterShare on Google+Email this to someone