The Brexit Column: 2017 stormy but clearer skies to come

Brexit Column: 2017 stormy but clearer skies to come

Mark Essex predicts stormy weather over Brexitland during 2017, but companies that learn to take decisions with imperfect information can ride it out.

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Director, Public Policy

KPMG in the UK

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Sorry not to offer a more upbeat New Year’s message, but I forecast stormy weather over Brexitland through 2017. The near-term signs are not encouraging. The politics of Brexit, at home and in Europe, will heat up considerably. Moreover, the lack of any certainty around Britain’s future relationship with Europe will only serve to unnerve consumers and investors further. This column is no harbinger of doom however: I believe we are likely to look back at 2017 as the low-point on the Brexit journey. For those who can hold their nerve and ride out the year, I see far greater reasons to be cheerful about 2018.

First of all, a relatively confident prediction from me: the government will trigger Article 50 by the end of March. Whichever way the Supreme Court rules later this month, the government seems utterly determined to hit its own deadline, if necessary by introducing legislation which the Labour Party has indicated it will not block. For those who cling to hope that Brexit won’t happen, March could feel like a cold shower. 

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Once the prime minister has set out the UK’s negotiating stance in the coming weeks, the rhetoric on both sides is likely to ratchet up considerably. The gulf between the two sides’ positions seems substantial (as you would expect at the start of negotiations) and both parties need to appear willing to walk away from the process. For that stance to be credible (and as a reasonable precaution) the UK will need to explore, and prepare for, a ‘Hard Brexit’. At the same time, European leaders, seeking to fend off an anti-EU challenge in the Dutch, French and German elections, will talk loudly about “unity of the 27” and “no special deals for the UK”. Don’t pin your hopes on an early breakthrough.  

If debate turns into quarrel, businesses hoping for constructive talks and a smooth transition will be starting to feel queasy. With the two sides refusing to budge by the autumn, a deal with the UK sitting outside the Single Market and Customs Union, might start to look like a nailed-on certainty. 

Equally worrying, deadlock over the detail needed for a smooth exit could make it seem like the grappling sides are, together, hurtling towards the “cliff edge” Theresa May has warned of. Dropping off that cliff in late March 2019 would prove incredibly costly to business – potentially paralysing trade, sowing confusion across the economy and leaving 2.8 million EU citizens in Britain, and 1.2 million Brits in the EU, in a state of limbo.

Despite that picture, my advice is to hold your nerve, because I see any such deadlock easing before this year is out. Negotiators on both sides realise Brexit cannot unfold as many EU deals do –something settled at the 11th hour. And they know that businesses of all flavours – from manufacturers to financial services providers – need at least a year to make the first set of essential changes: setting up customs warehouses, establishing EU subsidiaries, securing new workers, and so on.

The shape of the deal, if not the detail, therefore needs to be in place by the spring of 2018 – giving the UK and EU roughly six months between Germany’s parliamentary elections and the start of the one year countdown. It might seem like a short window, but there is no reason to think that once Europe’s election-fest is over and the high costs of a disorganised Brexit become clear that cool-head rationalism will not prevail. It may even start sooner, behind closed doors, though that is little comfort to any business needing to make decisions now.

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Can’t wait for 2018?

Businesses still need to traverse a tricky 2017 however, lacking the one thing they have enjoyed for the best part of 30 years: a benign political environment that offers certainty in which to take decisions.

In fact, certainty is becoming a scarce resource and as such, it will have to be treated like any other scarce resource: you have to work harder to find it and then do more with what you do have. For businesses that are good at solving problems, agile and able to move quickly, the current environment should hold less fear.

For those who remain unsettled, it is worth remembering a couple of things. First, you don’t need certainty all the time; only when you need to take a decision. Nor do you need to know everything (though that would be nice), only the variables affecting that decision. 

Enjoying the certainty of a settled political order, businesses have been able to focus on consumer trends, demographics or the macro-economic environment. And on the basis that these factors changed reasonably slowly, a system of decision-making has evolved using standard analytic tools such as the annual budget.

That world no longer exists. More decisions will need to be “hand-made” by decision makers marshalling specific data and information. Forecasts will be less reliable so more senior management will need to spend more of their time assessing risks and making operational and tactical decisions. 

This year is likely to prove a particularly turbulent one for those most affected by Brexit.  All companies will need to make decisions over the next 12 months, so it’s no use bemoaning the lack of certainty. Those who adjust better to greater uncertainty in 2017 will be able to act earlier and take more pro-active decisions than competitors. The discipline of taking decisions with imperfect information will stand companies in good stead, even if the skies clear in 2018.

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This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK. You can register for the email subscription list of this column and expert views from our Brexit leaders.

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