Amanda Tickel and Raoul Ruparel OBE from Deloitte’s Brexit Insights team examine the interplay between Brexit and the pandemic
With trade talks continuing this week, business leaders will be keeping a close eye on the negotiations to judge the likely impact on their operations when the transition period ends and Brexit takes full effect. But with business still in the midst of the pandemic, the two sets of economic impacts are compounding one another – particularly for supply chains, costs and resources. Preparing for this complex relationship on both fronts at once will be crucial over the next few weeks.
The UK and other European economies have seen some of the steepest GDP declines ever due to the pandemic. While the recovery is likely to be gradual, many of the impacts could eventually prove to be temporary. Yet there may also be hard-to-predict, longer-term socio-economic impacts, such as changes to supply chains or in the ways in which people and organisations work.
Brexit, by contrast, is likely to bring more predictable changes to the way the UK trades with the EU and some of its other trade partners. However these changes will be permanent.
It is key that business leaders plan for 2021 with the interplay of the pandemic and Brexit in mind, focusing, we suggest, on three specific areas: supply chain, people and resources.
Both the pandemic and Brexit will inevitably impact supply chains, especially for industries with operations across several countries. The clearest example of a sector negatively affected by both is automotive.
A car produced in the UK will often have in excess of 30,000 parts, many of them imported from the EU and beyond. With 53 percent of UK-assembled car exports and 69 percent of UK-built components exported to the EU, a 10 per cent tariff on exports (which would be the EU tariff UK exporters would face if a Free Trade Agreement is not reached) is projected to cost £1.8bn.
Suppliers in the manufacturing sector as a whole are struggling to operate under coronavirus restrictions due to a reduced workforce or difficulty maintaining safety in the workplace. Both the coronavirus and Brexit are acting in concert to increase costs within supply chains, the former via uncertainty and unexpected constraints, the latter via known increases in administration costs associated with moving products between UK and EU.
So businesses should adjust the supply chain with both Brexit and the pandemic in mind, rather than considering independently – immediate demand due to the coronavirus may be depressed, but at the same time building up stock may actually be advisable to avoid disruption at the end of the year, caused by changes in import and export procedures.
Given the potential for further restrictions, there is no guarantee it will be possible to move people across the UK and EU over the coming months to service new operating models required as a result of Brexit, and staff themselves may no longer be willing to move. Whilst a large part of the workforce has become used to working from a virtual office, this will not satisfy regulators that require services to be provided in-country.
The UK has already set out the broad details of its new immigration system. Industries such as retail, which typically rely on lower skilled workers, may face difficulties due to the imposition of new salary thresholds and skills requirements. However, if a period of near record employment comes to an end, the impact of the pandemic may actually mean firms looking to hire domestic workers have more options than was first thought as a result of Brexit – so the effects of the pandemic need to be overlaid onto original Brexit plans.
Business should review their workforce needs and the supply of talent in light of both domestic availability, and the need to obtain sponsor licences to recruit EU nationals in future. For those used to a mobile workforce operating within the EU, whilst the reduction in travel costs due to the pandemic might be an immediate benefit, in future the ability to move people around to work in other EU countries will be limited and more costly due to visa requirements, with or without a deal.
Finance leaders have reported the pandemic has significantly impacted balance sheets and cashflow, with a decrease in profitability and sharp rises in corporate debt.
The combination of Brexit and the pandemic is forcing firms to reconsider their footprint. Large financial services firms began re-evaluating the role of their real estate after the 2016 Brexit vote, with many considering moving back-office functions out of London. The pandemic has only added more impetus to this trend among a much broader base of businesses.
Overall, the combination of Brexit and the pandemic confronts firms with an extraordinary challenge. There are a few key takeaways for business from our analysis:
- Time is short and Brexit plans need to come into focus across the board: from supply chain and people, to regulatory and tax.
- Strategic decisions made fast as a result of the pandemic will need reassessing given the Brexit overlay.
- Implementing Brexit in the next few weeks could represent a significant workload on teams, often the same people who are managing the impact of the pandemic – if you can spread the load, actively do so.