Companies advised to stay calm despite Brexit uncertainty and volatility

This week saw both the European Commission (EC) and International Monetary Fund (IMF) cut economic forecasts following the UK's decision to leave the European Union (EU). The EC said Brexit will lead to a "substantial slowdown" in UK growth. It has revised its estimate down from 1.8% to between 1.3% and 1.6% this year, with a potential 0.3% GDP contraction in 2017. The Commission also predicted that growth in the eurozone would slow to between 1.3% and 1.5% in 2017, from 1.5% to 1.6% this year. At the same time, the IMF reduced its forecast for global growth for 2017 from 3.5% to 3.4%. The UK referendum result has far-reaching implications for the UK economy and the political environment in Europe more generally, according to Guy Miller, chief market strategist at Zurich Insurance in Switzerland. "With Brexit comes considerable uncertainty around the direction of politics, legislation and the economy," he told CRE.hideMr Miller warned of complacency as Brexit fears temporarily subside. "This could be the calm before the storm. Significant disruptions will not materialise this week or next month, but they may become more apparent as the complexity of the divorce proceedings with the EU and the challenges of building new relationships become [clear]," he said. There are some major economic and operational risks associated with Brexit - notably the impact on growth, inflation and currency volatility - but these should be manageable for business, according to David Page, an economist at Axa. "We will see further falls in sterling and a material decline in economic growth, but not on the scale seen in 2008 and 2009. Economic risks should be manageable but there will be uncertainty and a period of transition with no clear end point," he said. Inflation is likely to rise in the UK, reaching around 2.4% in 2017 and 2018, predicted Mr Page. However, this is not a "material deviation for business", he said. Of more relevance will be currency volatility, which could see sterling depreciate a further 6% to 10% during the next year, he believes. It has already fallen some 15% since the referendum. Brexit will have implications for the UK and eurozone economies if inwards investment is significantly impacted and companies hold back on expansion or hiring. Brexit is likely to make some companies more risk averse in the near term, said Mr Page. Foreign companies investing in the UK and UK companies exporting to the EU are not likely to expand capacity while uncertainty persists, he said. The UK is particularly dependent on foreign direct investment (FDI). It is the third biggest recipient of FDI in the world. Europe provides some 50% of the UK's FDI. "With a budget and current account deficit, the UK is dependent on foreign investment and, given uncertainty created by Brexit, many companies will wait to see the outcome of negotiations before they commit to capital expenditure," said Mr Miller. Making an assessment of the risks associated with Brexit is difficult in today's climate of uncertainty and impassioned public debate. "Risk managers need to be realistic and acknowledge that uncertainty has increased, with an interconnected mesh of economic and political risks," said Mr Page. Mr Miller urged caution in the near term, at least until more information is made available. "Don't make knee-jerk decisions. Companies need to understand the dynamics at work and the economic constraints and opportunities. Being bold at a time of such uncertainty could be dangerous," he said. Zurich is not predicting a prolonged recession in the UK, but forecasts moderate growth during the next two years of around 2%. Axa is forecasting UK growth will slow to 0.4% in 2017. There is likely to be a significant slowdown in the UK economy and a rise in employment, as well as further pressure on sterling, said Mr Page. Brexit is also likely to have similar knock-on effects on the European economy, which is already marked by subdued growth and disturbingly low inflation. "The Brexit vote has come around at a time when the global economy can least afford it. Debt is high and growth is low, with little fat in the system to act as a shock absorber to any exogenous shocks," said Mr Miller. He emphasised that stimulus cannot just be left to the central banks. It requires a combination of both monetary and fiscal initiatives if a faster and more persistent expansion is to be achieved, he added. "Now is the time for more decisive action," said Mr Miller. Brexit also poses a potential risk to the supply of labour, according to Mr Page. Migrant workers account for some 16% of the UK's workforce and 40% of those are from the EU. There are already anecdotal signs that some companies with specialist recruitment needs are finding it more difficult to attract talent, according to Mr Page. Although some semblance of political stability has returned with the appointment of a new British Prime Minister, political risk is likely to remain a factor for a considerable period, predicted Mr Miller. "Those voting to leave the EU have different ideas on what Brexit means to them. Some emphasised immigration, others bureaucracy or the cost of membership. There was not a common bond, nor a clear roadmap of what would follow," he explained. "Consequently, many may feel let down by the eventual plan, in that they did not get what they thought they voted for," he added. The UK's decision to leave the EU also has implications for the political landscape in Europe. The vote will have come as a "wake-up call" to Brussels, which will need to heed the calls for tangible reform, according to Mr Miller. He noted that Italy faces an important constitutional vote in October. If Italians vote against proposed reforms, it could ratchet up political risk in Europe by another notch. Political and economic uncertainty is unlikely to be removed any time soon, believes Mr Page. It may begin to improve gradually next year as the UK's plans, and how they are received by the EU, become apparent, he noted. "Managing the uncertainty will be challenging for business. It could last two or three years but companies will not be able to wait that long and may have to move on and make decisions," he said.

Companies advised to stay calm despite Brexit uncertainty and volatility

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